Monday, February 12, 2007

Rising Interest Rates

I haven't been paying much attention to interest rate in India. I came to LA in Apr 2006 right after applying for a home loan. At that time (Jan '06) the ICICI floating rate was 8.75%. By april it had already gone up by 0.75%.

I was not expecting it to rise much further. Imagine my surprise when I checked it couple of days back and the rate was at a whopping 11.75%.

In hindsight, this seems to be an obvious outcome of a fast growing economy. Indian economy is expected to grow at a rate of 9.5% for fiscal year 2006-07. This has led to higher inflation and RBI is worried about overheated real estate market. And going by my experience they have much to worry about. Property prices are doubling almost every year. My own house has doubled since I purchased it in Sept '05.

Therefore, inevitably interest rates have to go up. Therefore, it is no surprise interest rates are where they are. But if you look at them for after 9 months and see the up by 3% you are bound to be shocked.

Finally, I have to compare India with China. Both are growing at breakneck speeds. Only difference is China's inflation rate is low (or it was when I last checked, I have to see the latest numbers). What this means is they have a much higher real growth rate. I was reading somewhere India is 5 years behind China. Let's hope we manage to keep up with them and not slip further behind.

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