With sub-prime interest rates touching 19% being charged from cash strapped people by Indian banks (these are mostly personal loans that are being pushed through by those annoying telemarketers) and most banks raising the credit card rates upwards by almost 100+ bps, we seem to have reached the peak of the interest rate cycle. Banks are lending at approx 14.25% to most businesses

Ever since the RBI embarked upon the interest rate hike cycle to control a not so run-away inflation, controlling the property prices bubble etc., more and more people who had really not seen the boom and bust cycles of the past and who had taken an inordinately high amount of debt; that seemed to be easily serviceable then based on their income; are being pushed into a corner where their income now in a high interest rate regime is not enough to make ends meet!

Primarily we will have two kinds of affected people who resort to availing these instruments:

- Salaried

- Self employed business men

Salaried guys, who bought houses, cars, land etc. are probably financially quite tight by now as in all probability the increased interest burden would have squeezed away any and all surplus by now. The more enterprising ones, who leveraged a bit more by buying at least one more flat in a non-existing building that various builders had started offering should already be close to despair since the buyers for these investments have disappeared and if they can find some, they may not be willing to pay the price to even cover a face saving getting out!

My advise is that if these chaps still have the income and they can stand living in a tight cash situation, to either stick to these investments for the next boom cycle that may come in the medium to long term (my estimate is that the horizon is at least 2 years away since the RBI will start lowering rates after a few cycles by the FED and the entire cycle of gradual lowering will take at least that long) or if they cannot, they better get out of at least the surplus investments.

Of the self employed business men, there are two varieties, one whose businesses are dependent on domestic market on the one hand and others who have the double whammy of not only high interest rate burden to contend with but also to figure out ways and means to manage their businesses with the appreciating rupee putting pressure on their bottom-lines significantly.

For most self employed businessmen, their businesses do not generate the kind of profits where interest rates of 15 - 20% pa are sustainable! The high cost of funds bootstraps them and they are forced to lower their spending including maybe their own wages! The advise to them would also be to plan for cutting all high interest bearing investments as soon as possible and concentrate on building efficiencies in their businesses.

When Murphy’s Law is playing out, the bad news just doesn’t stop coming.

We are going to see a below average performance from most of the IT sector, Industrial production is slated to go down in the current quarter, in my belief, the stock market is going to see another low soon, the government is more un-stable than we can imagine and I am confident that we will soon have the general elections before the financial year is over!

Internationally, The US economy has splurged ever since Bush has come to power and I feel that it will drag others down sometime in the near future! It is too big an economy to not have an adverse affect. International political scenario looks like headed for another bout of war with France today joining the club of warmongers by openly declaring that it is prepared to go to war in Iran! This offcourse is for oil, as has happened in the times of the Iraq war, if this does happen, global economy will bear another major shock.

We can always this by counter argument that that the GDP of the nation is growing by 9% and the economy is growing; but in my view that is not going to help in this phase of the cycle. High growth means that more money comes into the system fuelling inflation. RBI cannot continue to sterilize by mopping up the excess liquidity as it had been doing consistently for so many years. It will increase interest rates further or will at least not lower it by prolonging the arrival of the phase of rate reduction cycle. Already they allowed the rupee to appreciate drastically, as the game plays out, its options will become more and more limited and it will try other fiscal measures to cool down the system and maybe allow the rupee to appreciate even further. Already there is a talk of the exchange rate moving to 35!

I am no economist, but I think that this will further burden the salaried and the self employed and they should start thinking about quickly getting their finances in order – urgently.

The cycle, once unleashed will have to play out completely – no choice. Coupled with events we can predict and others that we cannot predict, I think most of us will have roller coaster times ahead..

Will the economists amongst us step out and guide us please.