PLR, SLR, CRR, repo rates cut - is it really worth it for common man?

The speculation on rate cuts has been all over the media, be it newspapers, TV or magazines. Everyone is hoping to get some relief from RBI and finance ministry in form of interest rate cuts. But do these rate cuts really change much for the common man on street? The answer is indirectly, of course, it affects the common man. The corporates can borrow at lower rates, can get the credit to boost their production or in most cases for the operating cash requirements easily. The banks get the liquidity more easily and can cope with redemption's happening due to insecurity in market. It also helps in controlling the market crash a bit. All these things affect the common man here or there in a touch and go manner but not directly.

In real life, the rate cuts make small dents in the wall that separates common man from larger dreams. The dream of owning a house, the dream of graduating from a scooter to a car and so on.
These rate cuts can make the loan EMI smaller but only by a small percentage. For 75 basis point cut or 0.75 % cut, a 20 year, 50 lakh loan EMI comes down from 51,000 to 49,500. I mean, its still unaffordable for most of the people and if you have gone shopping inIndian real estate market then you must be aware that 50 lakhs may or maynot get even a small house.

Perhaps the need of the hour is to promote more affordable housing, instead of promoting all residential projects. Most of the builders are investing in lavish, lifestyle apartments and focusing on affordable housing. These builders also enjoy the benefits like subsidized lands in certain cases but these benefits never get passed onto the public.

Inflation defies all odds

This weeks inflation numbers confirm the doubts I posted in my last entry. With the cheaper credit being available in markets, inflation figures have started moving north again. And now as the PLR is being cut by PSU banks to make loans cheaper, it will make sure that inflation stays put.

On the other hand, the petrol and diesel prices have been reduced to 45 % of what they were 3-4 months back but there has not been any cut in Indian markets. Now, if you pay a little attention you will see that trucks that carry all the common goods run on fuel. And if the fuel prices are high then goods prices are going to be high as well because the transportation costs are high and these will be passed onto the consumers.

Citing this as a simple example, does it not make sense to cut the fuel prices to relax the inflation?
But as always Indian economy follows a lag routine.

Cut the rates dude, says the PM and FM

The new rate cut policy for RBI is expected to do wonders in Indian market by making sure credit is available easily. But tell me is'nt that the root cause for inflation. But they say, that beast has been tamed for now. Inflation is creeping down slowly as demand reduces in markets and commodity prices crashed. But by relaxing bank norms and slashing CRR and SLR, is'nt RBI creating a favorable scenario for Indian banking crisis.

Just to explain,
CRR is cash reserve ratio - the % of total money that banks have to keep with RBI. If the CRR is higher, banks have less money to lend and viceversa.

SLR is statutory liquidity ratio - it is the % of money banks have to invest in government securities. Again, the higher SLR is, lower is the amount available for lending and viceversa.

Fall of the sub-prime market - 2

I have got unfinished business.

So, I am back to finish the story of the fall.
Since 2000, the property prices in US were going up due to increased demand and the interest rates were going south. Together these 2 factors made sure that people invested even more to make a quick buck.

In 2004, as fed started raising interest rates in US to counter the inflation and control the economy, the mortgage rate also started rising. Increasing interest rates and stabilizing prices in home markets, slowly made people realize that perhaps they will not make as much money as they expected from their investments in property and some of these people started selling, putting more pressure on prices.

Also higher interest rates made sure that the credit unworthy people default due to higher installments. So all in all situation was getting similar to what we have in Indian markets now. Indian property market has seen tremendous growth in past few years and now with higher interest rates and credit crunch, we are preparing for a fall in prices.

So in brief, prices started going down causing foreclosures (where banks come and claim your house against default of loan). Banks were happy as they thought the houses will pay for the loans but as situation worsened prices dropped even more and banks could not find buyers for these properties. The spiral downwards had begun.

Now lets look into the payment for those institutions that had invested in CDO's. Remember, the regular payment to these institutions was to be sourced for installments against the loans. Now after defaults people stopped making installments and as banks could not sell and make payments, these institutions started claiming their insurances or CDS. This lead to further pressure on insurance companies and on banks causing them to go bankrupt.

AIG and Lehmann are just 2 examples. We will be talking on this insurance game later on as well. But well that perhaps is an abrupt ending for this post.