It’s time to shift to a teaser loan — fast!

The Reserve Bank of India has hiked the cash reserve ratio by 0.75% to 5.75% in the third quarter review of monetary policy announced on Friday, which will be implemented in two stages.

The central bank has left unchanged the reverse repo, repo, and bank rate at 3.25%, 4.75%, and 6%, respectively. So what does all
this translate into for customers like you and me?

The quantum of the increase, at 0.75%, was a tad higher than the market consensus of around 0.50%. RBI has increased the target growth for 2009-10 from 6% to 7.5% for the year, and has clearly indicated that its policies will now shift from “managing the crisis” to “managing the recovery,” and thus reverse some of the steps undertaken to provide liquidity in the market. The bank has also indicated that the “recovery is getting established and inflation fears are coming true”.

In fact, we can expect more such  action including an increase in the  repo rate, bank rate, and the reverse repo rate.

Reading RBI’s move 
If you strip away the conservative language favoured by regulators, it means interest rates are on their way up as far as the regulator is concerned, and hence, we will definitely see an increase in overall interest rates this year. The quantum of the increase, however, will depend on how inflation shapes up, and that in turn will depend on a host of factors such as demand for credit, monsoon, etc.

Impact on consumers
*For savers and investors: If you are thinking of depositing money with a bank, then it is advisable not to get into long-term deposits. Instead of making a 5-year deposit, you should make a 6- or 12-month deposit, as it is very likely you will be getting better rates when the deposit comes up for renewal. 

*For new loan consumers: From a borrower’s perspective, interest rates may not get affected immediately (in the next 45 days or so) but there will be an increase in the near future. So if you were going to buy a home or a car in the near future, it makes sense to prepone your borrowing and go in for the current teaser schemes with their safety of fixed rates for at least 2-3 years. Teaser rates for a year or so are available in car loans as well and customers should consider these.

*For existing loan consumers: If you were smart enough to have taken a teaser loan in the last 6-9 months, then just sit back and relax since you have already made the right move. But if you have borrowed on a regular floating rate, you should immediately shift to a teaser rate loan. Do it in next two-three weeks itself, before interest rates start to harden or the teaser rate schemes are withdrawn. I repeat — do it now! If necessary, the shift can be to the same bank from their regular floating rate loan to a teaser rate loan.

Sure the teaser rate loan only secures you for only the medium term (the first 2 -3 years), but it is better than nothing. To quote the economist John Keynes, “In the long run, we are all dead.”