EMI inflation

As these columns have mentioned before, hiking interest rates might well be a counter-productive response to higher inflation. There are several reasons for this apprehension: the nature of the inflation with which we are faced, driven as it is by specific supply-side factors; the efficiency and penetration of modern financial systems in the Indian economy; and problems within the monetary mechanism itself. There is, however, an additional problem, and that is with how blunt an instrument an across-the-board hike would be. This newspaper is currently featuring the stories of some middle-income families who are struggling to maintain monthly payments on homes that they bought when interest rates were low. Those of the almost five million urban households who have taken out home loans under Rs 20 lakh at adjustable rates are going to find a regime of higher rates very tough going indeed; the almost Rs 27,000 crore of banks8217; money tied up in housing loans will have to be scrutinised for additional risk.

Then again, this is a concern that goes beyond the numbers, worrying as they are. In many ways the expansion of homeownership that those loans represent is a crucial engine of growth in the economy and change in urban India, an almost talismanic symbol of the broadening aspirations of an entire class of Indian society. That aspiration is what underlies productivity growth in urban India and, like all psychological factors, is inherently fragile and must be preserved. And if anything, the social effects, while less tangible, are even more vital: the possibility of locational choice, of independence from parental or family control and resources, of the enhanced security 8212; emotional and financial 8212; that homeownership provides are all indispensable building-blocks of a stable modern society.

The consequences of ignoring the interests of these borrowers would thus be severe. It is still an open question as to whether they are being taken into account. The policy bias displayed by the framers of monetary policy is a clear indication that they are shirking their responsibility here, an impression only reinforced by the lack of transparency in their decisions, which means that borrowers do not have access to complete information when taking decisions that impact their future. The finance minister has previously signalled that he is not unaware of the importance of easing pressure on this class of borrowers: it remains to be seen if that sentiment can be turned into action.