One thing that is clear from the policy review document is that the Reserve Bank of India’s (RBI) priorities have changed: in future it will pay more attention to containing inflation than to nurturing growth. Most economists expect the central bank to start hiking interest rates either before or during the next policy review. Sonal Varma, economist at Nomura Securities, expects RBI to hike the cash reserve ratio (CRR) around December. However, the rate hikes are likely to be gradual since the recovery is still weak. Varma expects the cumulative increase in CRR, repo and reverse repo rates to be 125 basis points each during calendar year 2010.

Even after RBI hikes rates in January, banks may not immediately follow suit with hikes in lending rates. They are also likely to take into account their own positions regarding demand, supply and cost of funds. With credit growth weak, raising lending rates would adversely affect credit offtake.

Though interest rates are likely to head up only gradually, it is clear that the interest-rate cycle has turned. This calls for some recalibration of your investment and borrowing strategies.

Home loan borrowers

Residential real estate prices have moved up during the last one or two quarters, especially in the metros. Home loan rates may remain stable for the next three or four months, but they are expected to rise thereafter. If you are buying a house for self use, go ahead and buy, irrespective of the current price level. Take a fixed-rate loan — one without the money market clause (that allows banks to reset the interest rate on even fixed-rate loans every three or five years). Alternatively, go for a teaser-rate loan where the interest rate remains fixed for the first three to five years. Pre-pay as much of the loan as possible during this initial low interest rate period, instead of investing your surpluses in other instruments.

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