Back after a really long gap. I was training to be part of the first team of astronauts from India to Mars. I failed to make the cut so am back now on this website. Only to discover that all my money that was parked in midcaps has all but disappeared while I was away! I should have made that trip, I now regret my failing the entrance tests. Isn’t it true that Mars is the ruling planet of all midcaps? fiery, combative and volatile. mangal ho sabka!

The other big news is that the lady that’s our household help is hoping to be a leg up over inflation and has therefore delivered a verbal notice (in Telugu) for a generous increase in her wages. Since we don’t understand Telugu, that’s what we understood her point to be. Surely, she follows the other Andhra gentleman who is also the RBI guv, who seems quite sure that dipping the repo isn’t really going to get general prices down. He means ‘consumer’ prices. If you remember, the earlier technicality was to do with whether inflation is ‘supply side’ or ‘demand driven’. RBI said supply side constraints were pushing up prices. Point being that an increase in production capacity and productivity would bring prices down. On the other hand, the finance ministry seemed to have said all along that tweaking the monetary levers would push prices down – a reduction in rates would get investment and spending cycle going and therefore Mumbai should reduce the repo rates. Now, the debate has shifted to which rate should one look at. The RBI guv points to the stubborn consumer prices and demands that the government of the day do some serious belt tightening while Delhi points out the recent decline in prices in the mandis and thereby makes a stronger case for rate cuts going forward.

So is it the wholesale prices (tracked by the WPI) or the prices that end consumers pay (tracked by the CPI) should one follow? The answer surely cannot be the very Indian, “it depends” since, after all, economic policy and long term planning (as also salary revisions!) depend on the rate chosen. Most countries use the CPI and have dropped the WPI from their economic planning game since the seventies. The RBI is proposing we pay more attention at the CPI and make that our official inflation rate instead of the WPI. It’s said that since the CPI tracks movement in prices at the ‘point of sale’ that is really what matters to a country’s citizens. General public cannot buy at mandis at wholesale prices. So therefore, lets change our official inflation gauge to CPI instead of being one the few countries (Pakistan gives us company) that remain fixated on the WPI. Personally, I feel that the WPI serves us well. We are predominantly an export driven economy. The other industrialized nations have made the transition to being completely consumer driven industries. So they track consumer price level changes. What is confusing to me is China’s decision to move away from WPI in favour of the CPI like the industrialized nations – I personally think it is very much an export driven producer economy (bigger version of India) and the consumer culture has not yet set in there.

CPI vs WPIIt’s really funny – in 2008, when the CPI in India was way lower (7%) than the WPI (12%), people (i.e. industry lobbies) were pointing to the high CPI and asking for a rate cut. Now they are pointing to the WPI and still asking for rate cuts. This led me to read up articles on the net to check if there is some cyclicality, causality or inter-dependence between the WPI and the CPI. The reason why the WPI and CPI are not moving in step is easy to understand – just look at the constituents of the indices to figure it out. There’s no rocket science or great economic mumbo-jumbo when the Prime Minister says that the food costs are running ahead of all else – more so, those of the protein based foods. Core CPI (ex food and fuel) has really dropped from 10.5% (in Jan’12) to 8% (in Jan’13) – so it’s pretty obvious that the reason why the CPI as a whole is still ruling at 10.5% is because of food and fuel. The weightage of food and fuel is very different across the WPI and CPI. The weights of the items that form the CPI basket are derived from their share in a typical consuming household. So things like imports and exports and wastage and storage (remember food stocks piled up in FCI godowns?) become critical factors that can make end buyer prices very different from producer prices. At a very general level, does it not mean that WPI + supply chain related affects = CPI? You get the idea, right? So I did two things – I looked up the internet and also plotted CPI and WPI values over the past 7 years to check if any patterns or correlation exists. Take a look at this paper which says that in India, the WPI leads the CPI. It points out that the WPI seems to be predicated by market forces and that controlling the factors affecting WPI can give a lever to controlling the prices at the consumer level. India’s per capita income, though low, is increasing and the nation’s consumption basket is slowly shifting towards non-core food items and hence despite the high weightage of food items in the CPI, it is unable to lead the WPI to a greater extent. So, while the paper does point to the presence of bi-direction causality, the impact of the WPI on the CPI is higher than that of the latter on the former. Also, WPI leads CPI which makes it the leading indicator of consumer prices and therefore eligible as a inflation planning gauge in the Indian context.

Petrol on a Roll

Economic medicine that was previously meted out by the cupful has recently been dispensed by the barrel. These once unthinkable dosages will almost certainly bring on unwelcome after-effects. Their precise nature is anyone’s guess, though one likely consequence is an onslaught of inflation.
Warren Buffet

I did some number crunching and came up with the chart on the right. It shows the movement of the price of a liter of petrol in INR (stepped blue line) vs. it’s price in equivalent dollar terms (red line) over the past 10 years. The price of petrol in equivalent USD terms has always been  higher than the local retail price except during Jan – Feb ’09. Petrol pricing strategy seems to rely on ‘fixing’ the retail price of the fuel so as to minimise the tracking error against the red line. I constructed this chart to test this exact same hypothesis – point being that the red line is indicative of what the Indian refiners have to pay, in USD, for buying crude oil from the international markets. The blue line is obviously indicative of the revenue they get when they sell it to Amar, Akbar and Anthony. So the gap between the red line and blue line essentially indicates the subsidy burden that the Indian economy and therefore what AAA (the three gentlemen above) have to bear via taxes.

Also, between the INR:USD exchange rate and the petrol price, the latter is the dependent variable, i.e. exchange rate causes petrol price policy. This also comes out through the tracking movement of the blue line vis-a-vis the red line in the chart above. I doubt if all get this – many think that recent petrol price hike will help arrest the recent fall of the INR. Well, nothing like that happened today. Most people also think that the RBI can intervene to control the INR. The fact is that the INR fx market is too large for the RBI to control anymore. We are living in very different times from 10 years ago [ref: these excellent articles by Ajay Shah. click here and here].

Now, what’s interesting with this recent hike is that it has happened at a time when the global price of Brent crude has been in a continuous fall since April this year! So India has increased its retail petrol prices despite a near 20% drop in the global price of oil! Reason being that while global crude oil prices fell by 20%, the INR dropped a similar amount in the same time thereby negating any benefits that could have accrued due to a lower oil import bill.

Also wanted to jot down the observation that the quantum of the recent blue line spike (i.e. price hike) is very high indeed. Maybe the Government had anticipated massive opposition to the move and hiked a lot so that they can roll back a partial amount to appease the insulted. Or it could be that Finance Ministry is seeing the INR go down to 60 soon and therefore have announced a one time whopper of an increase. I do not know what’s behind me but my chart certainly points to an anomaly – i.e. the blue line troucing the blue line by such a wide margin – perhaps for the first time in the past 10 years. Whatever be the explanation, the chart makes it quite clear that we live in exceptional times today and that all manner of caution and discretion is advised especially when allocation your capital to your ideas.

Incidentally, I am wondering if I should increase my ‘work from home’ days given that the price of petrol in Hyderabad has risen from 65.15 (16Jan’11) to 80.58 (24May’12) representing a 17% annualized increase. The only two major cities where petrol is more expensive than Hyderabad are Jallandhar (80.68) and Bangalore (81.01). Petrol remains lowest in Goa at 68.51, but even there, as in all Indian cities, beer is cheaper than petrol!! Cheers.

Repo Rate and Inflation

The Reserve Bank of India (RBI) has designated the weighted average overnight call money rate as the operating target of its monetary policy and the repo rate as the only independently varying policy rate in order to more accurately signal the monetary policy stance. So while cash reserve ratio (CRR), statutory liquidity ratio (SLR), market stabilization scheme (MSS) etc. are all important tools, the policy lever of RBI that is always in the spotlight is the repo rate. This is the rate at which banks borrow from the central bank blah blah…

A lot has been said about RBI’s role and its effectiveness in fighting inflation. Rate hikes are common knowledge to all in the country by now concerning that they affect people with loans in their lives. Interest rates have been rising in India (and all the emerging economies) and I had an investment thesis of catching banking stocks when the interest rate cycle turned. Interest rate senstive sectors like automobiles, real estate, banking etc. will get a breather if the rates turn. The sovereign debt crisis in Europe has however ensured that the hawks continue to circle above the Indian economic landscape. Fat chance that we may see a rate reversal. Indeed, the banking sector is badly mauled and it certainly does not look to be in a hurry to recover. I need to figure out what to do with my investment positions in Axis Bank and HDFC Bank – and towards that end I tried to read up and form an opinion on inflation, rates and their cycles. The below chart came out.

If you look at the period after mid-2008, there is a very perceptible negative correlation betweeen inflation measures and the repo rates set by RBI. I am saying correlation here. As you know, correlation does not automatically imply causality. I have shaded the three time periods of recent times where we can discern some sort of a clear monetary stand taken by the RBI. The light blue band is a period of declining repo rates. I have added a 12 period moving average of the monthly inflation rates (taken from ycharts) to show trending inflation information. As you can see, during this period, the inflation rate increased as the rate fell. Then the light yellow period (Nov’09 – May’10) shows the continuation of the trend started in the previous phase. The RBI further reduced the repo rate down to 4.75% towards the end of this phase – with inflation continuously rising while all this was taking place. Then finally, the green band, which we seem to be in today as well. Here, we all know the sequential repo rate increases affected by the RBI. The inflation rate did appear to have fallen from a high of 14%. But it is still high at 9.5% – 10.0%. So many experts (and some vested interests) have argued that the RBI should stop fiddling with the policy rates since these measures have not been successful in taming the beast. My point here is that inflation is whatever it is, but can you confidently say that the situation could not have been any worse than what it is today?

I guess, my view is that till this point successive repo rate increases have helped in “controlling” inflation. They may not have brought inflation back to the comfort zone of 5% – 6%, but they have definitely put some brakes on the juggernaut. Beyond this point, any further increases in the policy rates may actually be detrimental to the economy (from the inflation point of view)! Beyond a point, if rates continue to rise, they will do their bit to strangulate the supply side by making it uneconomical to produce. While you may smile when you read about farmers in Andhra Pradesh striking work, the fact of the matter is that very high rates do push out payback times, reduce rates of return on economic activity and shut down the cogs of industry. I would not be surprised if the increasing levels of cash balances with Indian companies is linked to them not finding any profitable incentive to produce/invent and invest. So, my hunch is that RBI will/should stop raising rates now. However, my holding in Axis Bank and HDFC Bank is still a millstone around my neck since a pause in raising rates does not mean that the central bank will start reducing them! It could be a good 6 months (if not more) before we start seeing a reversal of the current policy regime.

So what about inflation? Maybe we hope that foreign policymakers and governments are more adept than ours. FIIs run our stock markets by proxy anyways. If the cost of fuel starts falling and INR goes up (read as: USD depreciates since Americans would want Germans to continue buying American exports) then perhaps inflation will take care of itself. This will happen inspite of our Government which has done absolutely nothing to control the supply side pressure to inflation. In fact, people posture and talk as if the RBI is responsible for the supply side as well! We are in a hot air balloon now. Lets enjoy the expansive expensive view from the top. 🙂

Bling, Bling – But For How Long?

The Price of Food

I stopped by at a local grocery store on my way back home to pick up something for breakfast. The idea was to wedge an  oregano infused, golden brown double omlette inside slices of whole wheat bread layered in garlic and chilly-garlic mayonnaise. The ensuing breakfast was bearable, but the previous evening commerce gave me something to write about: the escalating prices of food in India. The egg at INR 3 per egg is a lot of egg in the face and the whole wheat bread leavened me with its INR 22 tag. I would recommend heading to the nearest kirana store, especially if you haven’t personally shopped for a while. I am sure the prices will shock you. Any crescendo that escalates at c15% per annum would.

I am sure Humpty Dumpty would have an even mightier fall today than during the early 19th century when he/it was conceived as being perched on that wall. The reason is simple – eggs are dearer since poultry feed prices (corn, et al) are increasing fast both in local as well as international markets. And that may not bode well for companies like Godrej (Real Good chicken, sob sob) and Venky’s India Limited.

There was a lot of attention to the Reserve Bank of India’s (RBI) winging up of its repo rates in a bid to contain inflation. Whether this move has its desired effect or not remains to be seen (in media). Actually, such causality might be difficult nee impossible to establish. Since a section of the intelligentia remains convinced that monetary tricks do not influence food prices and therefore the hesitant intervention by the RBI may not really amount to anything. While you may have certainly caught the story of the repo rate hike, this sagacious comment by Montek Singh Ahluwalia may have escaped your notice:

Rural areas have benefitted from the economic prosperity seen in the country. Demand for foodgrain, milk, vegetable and protein have gone up. It is a good development

Of course it is! But our preparedness to tackle the implication of that (i.e. a higher price level) may not be. The Deputy Chairman’s (of the Planning Commission) comment reminds me of a similar observation by the President of the United States (was it Clinton?) that countries like India should eat less! Here are some facts: per capita income in India has increased from 24,095 in 2004/05 to 43,749 in 2009/10 – that’s a CAGR of 13%. Agricultural productivity has lagged this rapid growth in incomes – growing at only 2% per annum. The large transfer of purchasing power via the Rural Employment Guarantee scheme has indeed ushered in a new found prosperity in rural India. In my native village, I never used to see the local folk eat vegetables and fruits. It was always variations of millets and pulses. They now have started to add variety to their cuisine, and as Mr. Ahluwalia says, what’s wrong with that?

There is an expectation of rice prices coming down this year due to the copious amount of rainfall that we received this monsoon but that might be washed out too. For since 2005, there has been a continuous rise in prices regardless of the monsoon. So what gives? It has to be basic demand and supply. If demand goes up and supply remains constant then the prices have to increase, right? How I wish our planners get this right – the re-rating possibilities for the fertilizer industry (if it can get it’s gas supply worries sorted!), micro finance organizations, irrigation sector (Jain Irrigation, Yo!) would be significant.

Our production is focused largely on basic food grains which are certainly not income elastic – i.e. one does not start consuming more rice or chapattis if one’s income rises. However, things like eggs, butter, fruits, vegetables, milk, meat etc are most certainly in greater demand if income rises. This will be difficult for someone from the industrialized world to understand, but in India, these food articles are aspirational to many. There are 370 million people currently in India living below the poverty. Forget an apple a day, even if they have consumed an apple in a lifetime till today, they’d be lucky. But all that will change and is changing…slowly. We need good old Keynesian artifacts in Indian agriculture, not RBI’s intervention. The focus should be on the Agricultural Ministry and not the Ministry of Finance.

And while Shri Sharad Pawar remains overworked and occupied by the political flux in Maharashtra, I do not think he is the only one to blame. The reason for the rotting mountains of grain in the Food Corporation of India’s (FCI) godown is less a consequence of callous administration as much as it being a fallout of India’s federal structure of government. It’s a states of the Union vs. the Union issue. The center just cannot get the states to lift off the stocks – I do not know why but I can guess that it must be due to pricing issues. FCI’s hoards cannot be culled by a mere addition of storage capacity. That’s a long term process – the short term measure is getting trucks to line up at FCI’s godowns are carting the stuff away. At least Sonia Gandhi did admit that the responsibility of bringing down food prices is as much the responsibility of the center as it is of the states.

The other important aspect is the cost of farming. In my village, a daily wage woman labourer was paid INR 50 a day to plant onion seeds. This year she is getting paid Rs.100. Male labourers are demanding INR 150. Just like the BPO industry, cheap labour that gave Indian agriculture its competitive edge is blunting rapidly. Cotton is another crop that is sown by my cousins in their farms. They are paying farmhands Rs4.50 for picking cotton this year, again double from last year. They tell me that the total labour cost for cotton has touched INR 15 per kilo this year. I can only imagine the plight of the farmland owners in rich Punjab and Haryana! This again comes back to the point – if a business has to start paying more per unit of labour then it needs to extract greater productivity per unit of labour. The fracas over the modest brinjal shows how arduous the path to this goal will be. Our farms need more mechanization, drip irrigation (Jain Irrigation, yo!), better seeds, non-urea fertilizers and understanding politicians.

QE2′s Titanic Voyage

The QE2, now moored at Dubai is a magnificent ship. It is an awesome flotilla of human engineering with 5 restaurants, 2 cafes; 3 swimming pools; a pub, a nightclub and several bars; a casino; a 481 seater cinema; shops; health clubs; the largest floating library and a hospital – all comprising an ecosystem of 3000 people (incl full roster of passengers) that circumnavigates around the world in 80 days. Given the cacophony of the other QE2 (Quantitative Easing, proposed & hopefully stillborn Round 2) in the US, I try to compare this Cunard marvel to the US economy. I randomly switch between QE2, the ship and the Fed’s QE2 (the raising of a shipwreck)

I have been absorbing and echoing popular thoughts that the recent Indian market rally has been fuelled by Foreign Institutional Investment (FII) related flows and that once this spigot runs dry, we’ll have a nice juicy correction. A big enough gash to seriously bleed the short term traders. But I never counted on the Fed docks building and launching another armada of liquidity into the markets! The US docks, from this perspective just never seem to run dry. And now I am big time confused. The QE2 rush of dollars will only add fuel to the fire, right? So, will we be seeing a near parabolic rise in Indian equity? Will the Diwali rockets fire up real high this year? You may have noted my aversion to seeing parabolas in stock charts from some of my past posts and the accompanying note that parabolas are not self-sustaining. Good for the Indian Government really – considering the slew of paper that is about to be thrown into the ring.

Like QE2, the American economy moves slowly and consumes a lot. The QE2 reportedly moves a cool 40 – 50 feet per gallon of fuel. That implies a mileage of 3.7 meters per litre of fuel. A snail (if blown up proportionately) will be supersonic in comparision, I guess. Like the ship, the American economy is moribund and is crawling towards what many are calling a recession? The QE2 has been navigated by 23 Captains till date, the Fed on the other hand has seen only 14 Chairmen at its helm. The QE2 was introduced in 1967, the Fed came about in 1913. The Fed Chairmen are quite sticky: like barnacles I guess. The QE2, when it was floating around used to consume 430 tons of fuels per day. My back of the envelope suggests that the US drinks 2.3 million tonnes of gasoline a day. I guess India’s figure is at 100 million tonnes of petrol a year.

The other important point is that the Royal Navy recruited the QE2 in 1982 to serve the original Queen in the Falklands War. Similarily, the Fed Captain is pushing QE2 to prepare for war. Only this time it will be a war that will be played out on the currency screens of traders across the world. We seem to be bracing for a full scale global currency war as the QE2 sets float. The difference being that this new artifact from the Fed is being pressed into service on an already raging sea of liquidity. The voyage around Tierra del Fuego has always been notorious – imagine creating a tsunami on a particularly nasty day aross this southern tip of South America as a solution to taking ships over and around the bend! Davy Jones Locker, surely. That too a man-made artificial tsunami. That’s what the Fed is doing, I think. Raising the waves in the hope that domestic (read US) yatchs, boats, dinghies and sundry canoes will start ‘consuming’ the momentum by hoisting up their sails, revving up their motors, rigging up the tow lines and picking up their sculls. Really? What many think is that nature will always choose the path of least resistance and this extra liquidity will quit the Atlantic and flow down towards more Pacific waters. Whither QE2? What will it achieve if that happens?

And finally one last lesson to pick up from QE2. It’s new owner is the Nakheel Group – an Asian real estate group with diversified interests in asset management, liesure and real estate whose website, just like the QE2 seems to be quite slow. The lesson is that developing nations one day will get tired of having to bear the responsibility of mopping up all of this money that the QE2 is spilling out. Unfortunately, it’s not a cornucopia – it’s really a runny nose. And the virus is catching on fast. Emerging economies will one day realise that they’d be better off buying US assets and directly injecting equity into the US system as opposed to buying the rapidly falling US Dollar. If the US domestic investment does not get kickstarted by this QE2, can foreigners buy mines, companies, set up offices in the US and provide employment directly? Can they, is the other question. Arnold Schwarzenegger is touring Asia to see who can build a high speed train system for California.

 The war is on. We saw two wars around the time the gold standard was abolished and the major countries of that age took it upon themselves to support local inflation by printing currency to fund war. After the dust had settled down,  the US dollar was to be much more than just the national currency of the US. After the gold standard was abolished, the US was at its zenith, unscathed by the World Wars and it took it upon itself to make the USD a truly global medium of exchange. The people managing the USD (the Fed Captains) therefore, theoretically at least had a global responsibility. They still have. The point is that when the Fed does things like QE2, the pain is equally felt everywhere. That is why this unilateral stewardship of the world economy will make the recalcitrant new kids on the block itching to pick up a fight. The rednecks will stolidly hang on to their artifical currency pegs while the boys in blue will stoke up local inflation. Common man will get crushed under the weight of rising prices and a Government might fall.

Additional reading:

  1. A view from Infosys’ Think Flat blog: Will QE2 sail or sink?
  2. A caption that I do not agree with: QE2 to speed triumph of emerging markets

Buying a House – Tips and Paperwork

Rishab asked a few questions a couple of weeks ago regarding buying property and I will try my best to answer these as well as I can. I guess what I can safely say is to take as much advise as possible from friends, family, bankers, financial planners (if you have access to them) and of course, the internet. It is a great proud feeling to buy your pad (if buying for the first time) and it also involves us emotionally. Like hunting for jobs, this experience should be enjoyed and not feared or seen as a chore. We don’t hunt for jobs or houses every day, do we? Here are a few words of advise that I can suggest from my limited set of experiences so far. Caveat emptor.

1. Pre-Owned or Ready only – I would recommend that you purchase a house that is near complete or second hand only. There is too much economic uncertainty and too much of leverage on the books of real estate companies in India to share project risk with the developers. We have one life and most of us get one chance to pick up a house – we should be as risk averse as possible. With land prices in urban India being bid up higher and higher, property developers have to borrow to buy. If the interest rates rise in the future it will make the going quite though for the real estate companies. That is the reason why the business model of Godrej Properties (GPL) is so cool – they mostly lease property from owners, develop it and share the profits. And that’s one of the reasons why I consider my investment in Godrej Industries Ltd (part owner of GPL) to be a part of my core holdings. Inner core.

2. Documents to look for

The following documents are usually sought for when buying a second hand property:

– Agreement of sale between the builder and the first owners and all the subsequent agreements of sale thereupon.

– Papers that uniquely qualify a clear title to the land. Also known as the Conveyance Deed.

– Registration certificate of the housing society. It usually takes 1 – 2 years after posession is granted by the builder for society formation.

– No objection certificate from the society to transfer the flat in the prospective buyers’ name.

– Copy of share certificate of the society. Once the society formation is complete, it issues share certificates to its members. You should take a look at this.

– A draft agreement of purchase (between you and the seller)

– Copies of municipal tax paid by the society. This may be tough to get but you should try.

– Occupation certificate granted by the municipal corporation to the builder.

– No objection certificate from the society to mortgage the flat in the favour of the bank, along with a letter stating the lien (this is in case you want to avail a housing loan)

– Income tax clearance of the seller (for registration purposes only). Check that.

There are other sets of documents that would be required if A) buying a resale flat if the society is not formed or B) if you are buying a new flat from a builder. Let me know and I shall email these to you. It is prudent to ask for/be aware of these documents. Indeed some housing finance institutions may not ask for all of these (more on that later) and the builder/society might spin tales as to why some of these documents are really not required – if that happens just walk out of that meeting. When I was looking around for my first house, a particular builder just did not want to part with the architectural plans and other documents of a second hand, unlived flat that I had liked. Luckily for me, I did not have a penny on me (only a promise of future income) and therefore I did not have any option but to look to a bank for finance. Since the bank would not advance the loan if the architectural drawings were not made available I had called it quits.

3. Finance – I am really in no position to opine on which housing finance company you should take your loan from. This decision is not as straight forward as taking out term insurance – in that case you should simply head to the insurer that offers you the lowest premium. Most properties are on the ‘pre-approved’ list of many financers – which means that they have already completed most of the paperwork required. Buying property in such buildings from these banks reduces the risk of landing up with an unclear title as well as easing up the paper work. Public sector banks in India generally offer the most competitive rates but dealing with them may not be a smooth affair. They don’t give a rats ass whether you give them your business or not. On the other hand, private sector banks put stiff sales targets on their sales people and you really do not want an over zealous sales turk to finance what turns out to be a sand castle to you! Finally, interest rates may very well rise in the near future. Inflation is too big a monster for the Reserve Bank of India (RBI) not to do anything to the current rates. However, most banks offer only a 3 year fixed when they refer to fixed rates. I daresay that if someone is to buy a house next year, he/she should pick a floating rate – but it really depends on your view of the interest rates. 

4. CIBIL Credit Report – You should apply and procure your credit report from Credit Information Bureau India Limited (CIBIL). This is available for a nominal processing charge and is one of the things that banks look for when deciding on the grant of the loan. There are known instances where people have found errors in their CIBIL credit reports and while the RBI prescribes a time limit of 45 days for compliants to get resolved, you do not want to be running around clearing the errors in your credit report. Purchase opportunities do not last forever. In fact you should procure and check your credit report regardless of whether you intend to take a loan or not. Beware, if you are blacklisted or your credit score is very low, the chances are extremely high that your loan application will get bluntly rejected without a proper explanation. The onus will be on you to investigate and clear your name. Even if this is your first mortgage application, the fact that you might have had credit cards to your name – some of them you don’t even know if you own – will reflect in this report. Just get that report – home loan or not. My gut is that the public sector banks will be quite partisan to the credit report. At least the private banks might be inclined to help you work your way towards clearing your record (if tainted) since there are sales targets to meet.

4. Other considerations – Some other points that you might want to keep in mind (readers, please add on to this list if you can. I will keep adding as and when I get new insights):

– While the useful life of buildings is usually considered to be 70 – 80 years, do not buy a property that has had more than 2 past owners or is more than 15 years old. Maintenance expenses spike up around this point in the life of a building.

– Do not pay more than 1% as processing fees.

– Best to get a term insurance cover from the same institution to cover the quantum and tenure of the loan. Use this option to squeeze a better rate from the bank. Reveal this card only during the latter stage of rate negotiation.

– One trick that many want to play is to play one bank against another when trying to drive a bargain for the best rate. I don’t feel it’s worth it – India is a growing economy. The mortgage to GDP ratio for rapidly urbanising India is a paltry 7% which is way, way behind the developed economies (60% – 70%). So, banks are not under too much pressure to run after you.

– If the seller of the house also has a mortgage, it’s advisable for you to take your loan from the same institution.  The process gets simplified. Unless of course some other instituion is offering you a much lower rate.

– Bargain with the seller like your life depended on it. In some ways, it does. At least your financial life does. Rehearse your speech and plan your tactics, even if it means you appear like a penny pinching moron.

– If you are married, buy property in joint name. Makes things easy later on.

– Try to see the locality during the peak of the monsoon season. You’ll get an idea of water logging, seepage etc.

– refer to my other post on Buying Property for some more ideas.

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