Rising interest rates: should you borrow or delay festive season purchases?

Summary

Looking ahead, we can be almost certain of additional increases in repo rates and the consequent hikes in cost of loans. We should factor in the uncertainties while making decisions around our future financial commitments.

Following the US Federal Reserve’s move to raise benchmark rates in September, the Reserve Bank of India announced an increase of 25 basis points in the policy repo rate on 7 October. Typically, such increases signal that interest rates are set to rise for a range of financial products, including loans and deposits.

Big-ticket corporate loans follow their own evaluation dynamics regardless of rising or falling rates. Consumer credit, however, reacts almost immediately to changes in interest rates and thus has a real-time impact on our day-to-day living standards. What should you buy? Property, vehicle, jewellery, electronic items, travel? And equally importantly, when should the purchase be made?

The timing of the recent increase coincides with enhanced consumer spending, which is the usual concomitant of any festive season. Online and offline retailers offer their best deals during this period to capitalise on higher customer spending. On top of that, lenders make life more exciting by providing quick and easy loans to drive spending during the auspicious season. Not to miss out on the festivities, credit cards also offer instant discounts on purchases with low- or zero-cost EMIs.

The increase in interest rates will not only impact new borrowers, but existing loan EMIs will also increase for loans linked to the benchmark interest rates. Consequently, you may then find less money available to splurge during the festive season. Do consider delaying non-essential spending.