Monday, June 29, 2009

Budget 2009 : Expectations

Expectations are high after the formation of the new government at the centre. The Finance Minister, Pranab Mukherjee, announced that the government will present the full budget on July 6. The signals are the government will take quick and strong measures to address structural problems and provide a stimulus to enable an 8-9 per cent GDP growth.

Analysts are expecting the new government to continue to favour a low interest rate regime. Since the Reserve Bank of India (RBI) has already reduced the policy rates many times in the last few quarters, drastic rate cuts from the current levels are not expected.

However, there is definitely some room for smaller rate cuts and to take steps to ensure that the benefits of lower policy rates are passed to all borrowers.

Low Interest Rate Regime

Indications from senior government officials confirm that the new government will take the necessary steps to keep the interest rates under control. The government is putting pressure on banks to reduce home loan interest rates for current borrowers, to bring them on par with the new loan accounts.

Currently, the public sector banks are offering lower interest rates, lower processing fee, lower pre-closure terms etc on new home loans. Since the inflation rate is at a historic low, many analysts expect a further rate cut in the RBI's policy interest rates.

However, since the liquidity situation is good and business/consumer sentiments are looking positive, a drastic cut in the key policy interest rates seems unlikely. The government is more likely to push banks to cut their lending rates, and pass on the entire benefits of the earlier rate cuts to the borrowers.

Focus on infrastructure development

It is a well-known fact that infrastructure has been a bottleneck in the economic progress of the country.

Analysts expect concrete steps from the government on the infrastructure development front.

It will be interesting to watch the initial steps taken by the government in terms of attracting foreign and private players' participation in infrastructure projects.

Fiscal Deficit

The fiscal deficit situation has reached a much higher level due to the stimulus packages announced towards the end of last year. The government has to find ways to fund this fiscal deficit and the infrastructure projects. Analysts believe that disinvestment in some public sector undertakings is certainly one way to generate the required funds.

However, another opinion is that the fiscal deficit will be dealt with in a phased manner spanning the next five years. It would be interesting to see how the government uses the funds towards the infrastructure projects.

Foreign Investments

A stable government at the centre will help in attracting further investments from foreign funds - both foreign institutional investors (FII) and foreign direct investments (FDI). This will help in maintaining the liquidity situation in the market and also provide a cushion to various infrastructure development projects. It will indirectly reduce the demand for funds from banks and hence put an indirect pressure on the borrowing interest rates.

It is safe to infer that the interest rates on home loans are going to remain stable with a slightly negative bias in the medium term.

The interest rates on new loan accounts have already come down quite significantly. The rates on existing home loan accounts are expected to drop further due to a push from the government.

Those planning to take a new loan to buy a house should go for it after evaluating the terms and conditions of the lending bank.

1 comment:

ansari said...

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