How will unchanged repo rate impact realty

The recently announced 'unchanged' Repo Rate garnered mixed reviews. This move comes as a cautionary measure in the very first quarter of the new fiscal year. How will this announcement impact the realty market?

We find out

Mohini Ahlawat, a prospective home buyer, has been waiting for the last six months in anticipation of an interest rate cut. She was yet again disappointed in the first quarter of this fiscal year but everyone told her that the growing GDP, lower crude prices compared to the last few years and a negative inflation, indicate that in the second monetary policy by the Reserve bank of India (RBI), a rate cut is on the cards. However, she is disappointed, yet again.

"I am not an economist, nor do I understand the financial jargon. But what I fail to understand is that if the GDP is indeed growing, oil prices are low in the global market and over and above that, the inflation too is low, then, why are the interest rates not reaching the range of 7 to 7.5 percent? This is the level at which an average home aspirant can think of buying a house," says Mohini as she shares her concerns.

However, the concerns of the RBI governor, Raghuram Rajan, are more from a macro level perspective of the Indian economy, ranging from a slight rise in retail inflation; an anticipated further rise in crude prices; a not-so-positive monsoon to the overall 'upside risk' to inflation after the implementation of the 7th pay commission recommendation.

Hence, the RBI governor kept the repo rate unchanged at 6.5 percent, the reverse repo rate stays at 6.00 percent. The Cash Reserve Ratio (CRR) also remains unchanged at 4 percent, in the recent monetary policy review. The RBI said that the April inflation reading makes its future trajectory somewhat more uncertain.

The central bank has also retained the growth projection at 7.6 percent for 2016-17 citing corporate profits and a surge in consumption. The RBI said it will soon review the implementation of marginal cost lending rate framework by banks.

The reactions

The industry is therefore as disappointed as the home-buyers. Shishir Baijal, CMD, Knight Frank India says that the sector is disappointed with no change in policy rates and it will take the real estate sector a longer time to come back on the rails.

The residential property market has not been doing well and there were expectations that the RBI would reduce the policy rates that would have given a boost to the residential property market.

"On a broader note, the RBI's stance of not reducing the policy rates could have emanated from the banking regulator's move to reduce inflation to below 5 percent by March 2017. CPI moving up to 5.39 percent and wholesale inflation turning positive, could be factors that may have prompted the banking regulator to leave the policy rates unchanged. Crude prices moving up exponentially, is expected to further add to inflationary pressures," says Baijal.

Ashwin Sheth, CMD, Sheth Corp feels that the RBI has played it safe and has been more cautious about the monsoon and its impact on inflation. A rate cut at this stage would have helped in lowering the home loan interest rates, thus making home buying a reality for most buyers who have been eagerly waiting for the rates to cut down.

"The government has taken the lead in trying to implement policies that will boost growth for the real estate sector. In the same vein, the RBI too, should have looked at the real estate sector with new optimism. The central bank has reduced its policy rate by 150 basis points until now since January 2015. But the banks have cut their rates by only about 70 bps. In short, the economy is yet to get the full benefit of the rate cut. The banks should pass on the benefit to the home-buyers as this will encourage the buyers to buy their dream home," says Sheth.

A welcome move?

Manju Yagnik, vice-chairperson, Nahar Group, on the contrary, welcomes the RBI governor, Raghuram Rajan's announcement to keep the repo rate unchanged at 6.50 percent.

She asserts that the last RBI bi-monthly announcement had reduced the interest rate, but was not passed onto the customers by the banks. Banks should take this opportunity to pass on the benefits to the customers by lowering the interest rates, which will result in the home-buyers coming forth and buying properties.

"The Indian economy grew by 7.9 percent in the March quarter and was ranked as the world's fastest growing economy. This move will create jobs and create positive sentiments within the country. Also, keeping rates unchanged will help control inflation, which presently is at 5 percent with an upward bias," says Yagnik.

However, what can definitely be vouchsafed is that this is definitely not good news for the overall health of the housing market something that contributes substantially to the Indian GDP.

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