The years of easy money may finally be coming to an end. Banks were lending freely and at lower rates for a long while. Now, they will have to tighten their purse strings. Why should they be doing so now ? Inflation has rendered it impossible to keep interest rates low. This reversal in policy was a fait accompli. It simply had to happen. The question is not why it had to. The question to be raised is for how long the rates will be rising. The answer to that one is hard as the policy on interest rates is a reactive one and depends entirely on how inflation plays out. America chooses to keep rates low and money easily available. America ends up exporting inflation to the rest of the world. To solve her own problems she simply prints dollars and tells the world ` I owe you more ‘.
Developing nations like India and China have tightened their liquidity and let rates rise in a desperate bid to control inflation. The state policy of allowing the banks to lend you till you were stuffed out with loans is drawing to a close. But, without similar monetary action from the US Central bank (the Federal reserve), the Indian central bank,(the RBI) will only be left with the option of tightening further. Global Inflation will fall only if the Americans are forced to consume less, repay more and let their rates rise. These are not likely in the near term as America is not keen to bite the pill anytime soon.
India is left with limited recourse but to bear the pain inflicted by inflation, voluntarily slow her own economic growth down and wait for the world ( read America) to return to economic policies that are sensible. Raising interest rates seems to be the only recourse.
The way India manages her monetary policy will hurt the consuming classes. The ones who bought assets with loans will be hit the hardest.Asset prices will get hit. Refinancing of loans will be tough. Interest rates will rise as they are trending now. You will keep paying your banks and yet will not have repaid loans. Only interest will get paid off leaving you indebted for a longer time.
Sellers will slowly emerge leading to more supply. Buyers will get scarce. The balance will tilt and the scales of demand-supply will change drastically too. The fat that got deposited in asset prices will necessarily need to get burnt out . Assets carrying debt will get hit harder. Home assets will see a stress test. To believe that this time it is different would be a personal choice.