Neighbourhood Watch

The increase in bank rates announced on Tuesday by the Reserve Bank of India is an expected if unwelcome arrival. We have been told that there is no alternative to this policy because of the 8220;high and variable8221; future course of oil prices. This sounds particularly ominous 8212; perhaps the only justification for this invocation of permanently higher rates is an attempt to keep expectations of future inflation from anchoring at a higher level.

These columns have previously explored the limitations of monetary policy as an instrument for the control of inflation driven partly by commodity prices, and in the Indian context. What is of immediate concern now is the anticipation, prevention and mitigation of its adverse consequences, particularly on India8217;s fragile middle class. These start with the possible implications of a rise in monthly payments on home loans. While the numbers may not initially appear a daunting addition to what most borrowers were paying earlier, this newspaper8217;s continuing series on new home-owners struggling to meet their obligations demonstrates that that amount might make a crucial difference to their ability to do so. The housing finance sector has reacted with relative calm, but there is no getting away from the fact that some marginal loans will have to be looked at very carefully, and that demand for new housing will be depressed. As our columnist today points out, the true tragedy is that potential entrants into the middle class are getting priced out of owning homes.

It is a well-known fact that appreciation in house prices and, thus, the sustainability of loans, are very sensitive to the stability of neighbourhoods. Thousands of new neighbourhoods across the country, in which large numbers of houses are still being paid for, thus need to be protected against a vicious cycle of defaults, lower demand, and falling prices. Systems for extending and examining credit also need attention, before they are placed under even more pressure. The straining fiscal deficit might constrain direct intervention, but there is much scope for well-designed, low-cost policy while we wait for a hopefully speedy return to acceptable interest rates.