Layman Blog

Increasing Home Loan Interest Rates

There has been a series of so called baby steps in the monetary policy rates observed over a period of last 18 months, where a steep increase of rates for more than 13 times, resulting in increase of 350 basis points in Repo and Reverse repo rates. This step has attracted deplore among various quarter of different industries mainly from automobile, banking, and Realtor sector. And the condition further got worse on currency devaluation, where companies are ended up paying a higher price for the same import quantity they make, and thus forcing them to pass on the burden on the end consumer, thus increasing the prices. Thus leading to an economic slowdown.

As it is an supply driven inflation, the changes in the interest rates over a period dint incidental any major changes in curbing the inflation, but it had a slight impact reducing the inflation rates to some extent. RBI has to aware that, at this point of threat from bad to worse global situation externally, and surging rupee rate, high inflation, lower than projected economic growth, and a call to decrease the interest rates, along with a siren pleading for CRR reduction should be attended.

There shouldn’t be any changes in the Interest rates and CRR rates at least for a short period, because move in the either side could result in negative growth for the whole economy, and further steps has to be taken considering the impact on each and every segment over a period of time, ensuring for an long period growth rather for short.

The present foreign exchange market structure and the recent developments in the market. This article explains how the market functions? and various factors which affect the exchange rates, and implication on reserves of the economy.

Forex market, the world largest emerged financial market where 1 ½ trillion dollar worth of currencies are exchanged per day, and only market which is open 24 hours a day. A Forex market is where, a domestic national monetary unit is exchanged with a foreign market monetary unit for various reasons, where the exchange rate of two currencies is determined by the government and private participants in the foreign exchange rate market. The structure of market is divided into two parts namely Wholesale and Retail market, where bank deposits are transferred by huge commercial player and exchange of bank instruments between private customers are carried respectively.

Foreign currencies are needed for payments across national borders, which allow carrying business or other financial transaction between two or more country residents which is acceptable by either party for the transaction to be completed smoothly. Statistics says that in the foreign exchange market nature of transaction traded constitutes only 15% for goods and services and rest is traded by the Institutional/individual for speculation. Thus a heterogeneous group participate in this market, some conduct transaction for purchase/sale of merchandise well other get involved in direct and portfolio investment across the borders, some engages in money market trading in instrument like short-term debt internationally.

This is the most liquid market in the world, because the volume of transactions which are carried out in for-ex market is extremely huge because of many big players in foreign exchange market. Mainly the exchange rate is influenced by the factors like growth in GDP, interest rates, foreign debt, terms of trade, risk, and money supply are few of them.

In can be concluded that Foreign exchange reserves in an country is an indicator of a good sign of economy, where the country can import more goods, cope up with the crisis, and absorb the uncertainty, but the nature of the reserves has to be observed because it could adverse impact if the large part is form of NRI deposits where the interest burden of the economy increases.