Even as the latest monetary policy review by the Reserve bank of India (RBI) has maintained a status quo much to the criticism of the real estate sector, it has raised hopes since it puts pressure on the banks to pass the previous rate cut onto homebuyers. There are reasons to believe that the drastic rate cut, which could actually revive the housing demand, is on the cards but Raghuram Rajan, RBI Governor, probably didn't wish to dampen the euphoria of substantial rate cut with a symbolic cut to end the year. Moreover, he has always been concerned with the fact that RBI's rate cut is not reaching the homebuyers to the desired extent.
Reasons behind the optimism that the real rate revision is ahead are many. Despite the fact that there has been some surge in the consumer price inflation, the growth forecast of 7.4 percent is something that suggests consumption demand in the domestic market and the consumer spending is all set to increase.
The RBI, hence, in its monetary policy review kept the repo rate unchanged at 6.75 percent. The economists are therefore calling it a prudent measure keeping in mind the fiscal deficit, even though a section of real estate developers cried foul as it went against their long-standing demand for a substantial rate cut to revive the housing demand.
RBI's statement, however, reflected a larger macro-economic concerns as it said, "On the domestic front, provisional estimates of gross value added (GVA) at basic prices for Q2 of 2015-16 rose on the back of acceleration in industrial activity. Other indicators suggest the economy is in the early stages of a recovery, though with some areas of continued weakness."
Most of the analysts within the built environment of Indian real estate seem to understand the larger picture. Devina Ghildial, Managing Director, South Asia, RICS, maintains that considering the overall economic situation, earlier reductions in repo rate have consistently eased off inflationary pressure, which is visible over the last few months. However, this has not really transformed in pushing up housing demand in real estate sector, which is evident from industry reports released in the last quarter.
Shishir Baijal, CMD of Knight Frank India, also believes that in line with the anticipation, the RBI has kept the rates steady. The stand is in sync with the developments in the macro economic scenario wherein GDP growth has risen to 7.4 percent in the July September quarter from seven per cent in the earlier quarter and with around 30 percent contribution by gross fixed capital formation. Investment demand and manufacturing growth are also exhibiting a distinct rise. Further, retail inflation expectation is higher and actual inflation is likely to build up in the coming months as the impact of the poor monsoons unfolds.
"The global concerns including weaker rupee also add to the worries. The current stance of the RBI also underlines its concern that despite a total of 125 bps cut in the repo rate by the RBI till September 2015; banks have not yet transmitted enough the benefits to the end consumers. In real estate we do not see any dampening of spirits as a total of 125 bps cut in the rates is already done across the year and now much depends on how banks transmit the benefit to home buyers," says Baijal.
Analysts hence point out that regardless of this cumulative cut, banks on their own should be able to transmit more benefit to the end consumers as the cost of funds is becoming cheaper with improved liquidity conditions. Factors like a relook at the pricing strategy by the developers and abiding by project completion timelines and the overall economic growth also stand crucial.
The RBI is also conscious of the fact that less than half the 125 bps rate reduction this year has been passed onto customers by banks, and hence any further rate cut would be beneficial only when the apex bank takes action to standardise the methodology for determining base rates which all banks will move to.
Anshuman Magazine, Chairman & MD, CBRE South Asia, believes this decision was largely expected. The multiple rate cuts initiated by the RBI through the year have provided some relief to the economy and the real estate sector.
"While it will take some more time for the announcements to reflect at the ground level, the housing segment has seen stability and improvement in market sentiments. As we move into the New Year, we hope the RBI will continue to monitor the situation and make necessary adjustments to boost the economy," says Magazine.
The developers never the less have their own concerns. Nikhil Hawelia, Managing Director, Hawelia Group, asserts that concerns of the RBI might be at a larger picture of the economy and the interest of the real estate sector has been ignored in the process. According to him, a sector that has the potential to revive the real demand in the Indian market is not getting its due attention; something that will do no good to the Indian economy.
"I will call it an opportunity lost since this is the beginning of change of mood as far as consumer spending is concerned. There is a visible improvement in the Indian economy as well.Had the RBI taken cognisance of this, it would have given a fillip to both with a substantial rate cut," says Hawelia.
Developer's demand might be legitimate but what the RBI is more concerned with is probably the timing of any further rate cut. More importantly, it is expected that the next rate cut would bring a real change in lowering the EMI burden of the homebuyers. The current monetary policy review, therefore, may not be meeting the expectations of the real estate developers; it shows the way forward for a turnaround in the year ahead.
Source: magicbricks
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