Tuesday, 27 January 2015

RBI Moves to Tame Drop in Sentiment Index

The real estate industry has welcomed the RBI's move to cut interest rates by 25 basis points to 7.75 per cent, ahead of its routine quarterly monetary policy review scheduled on February 3, 2015.

At a time when the drop in business confidence index and consumer sentiment index was lending credence to a number of doomsday prophecies within the Indian real estate, the Reserve Bank of India (RBI) decided to step in. The RBI has moved to tame the dropping sentiments and has cut interest rates by 25 basis points to 7.75 per cent, ahead of its routine quarterly monetary policy review scheduled on February 3, 2015. It has been a surprise inter-meeting cut, yielding to growing signs of slowing inflation and a flagging recovery.

The ground realities also seem to support the move of the RBI as the wholesale price index (WPI) for December 2014 rose just 0.11 per cent year-on-year. Wholesale prices had remained unchanged in November. Repo is the rate at which the RBI lends short-term funds to banks. Banks are likely to cut rates for home loans, especially for new customers. The RBI cited lower than expected inflation, weak crude prices and weak demand, as well as the government's commitment to sticking to a fiscal deficit target. This symbolic encouragement to the market, however, was enough for the real estate fraternity to get euphoric with the obvious expectations of market revival in the year ahead.

Shishir Baijal, CMD of Knight Frank India, feels that the RBI's decision to slash the repo rate by 25 bps, is indeed a positive move which shall largely benefit the debt burdened developers and stretched households alike. “This decision will also boost stakeholder sentiments for capital commitments. While lower interest rates alone may not be a reason for celebration for the real estate sector, however, a definitive indication about its future direction is reason enough to put consumer sentiments at a higher pedestal and infuse a sense of optimism,“ says Baijal.

Shailesh Puranik, managing director, Puranik Builders, calls the RBI's sudden decision of reducing interest rates, a welcome move. According to him, the announcement may be the outcome of the weak crude prices. However, the decision is a good sign for the revival of the real estate sector and is in line with the industry's expectations. “The deduction by 25 basis points may be a beginning for the positive steps taken by the government for the real estate sector. While this may not considerably push the demand for homes, as investments are influenced by multiple factors but we can at least say that a good beginning has been made. We expect some more rate cuts in the days to come,“ says Puranik.

Mayur Shah, managing director, Marathon Group, says the RBI's decision to cut the interest rates by 25 basis points, has been a good surprise on the auspicious occasion of Makar Sankranti. “At a time when property prices and raw material costs have been rising sharply, the decision to reduce the interest rates comes as an appreciable respite for thousands of home-buyers and other stakeholders of real estate. While this may be the beginning, we are expecting some more positive decisions for the real estate sector that will boost the growth rate of the sector in the coming days,“ says Shah.

Anshuman Magazine, CMD, CBRE South Asia, says that the decision, early in the year, is a welcome one. “Given the current market situation, this reduction in the base rate is an important step in improving home-buyer sentiments, and hopefully, with the expected reduction in mortgage rates, it will improve residential sales across the country, which have been suffering from general slackness in recent times,“ explains Magazine.

Nayan A Shah, CEO and managing director of Mayfair Group, says it is a very positive sign that Dr Raghuram Rajan has initiated. Recalling it as the first rate cut after 2013, he says this will induce banks to offer new home loans at the rate below 10 per cent after a gap of around four years, which shall act as confidence building move for new home-buyers. “Also, lending rates by banks to real estate developers will come down. This shows the confidence in the economy and now that inflationary pressure is within control, more growth can be seen. Overall, it is very positive news for the economy,“ says Shah.

Hariprakash Pandey, vice-president, Finance and Investor Relations, HDIL, feels that the move by the RBI signals further easing going forward, the spiral effect of which will be much more widespread, passing on positive vibes across the sectors. “This could not have come at a better time as we have already started to witness signs of revival in the real estate industry. We expect customer sentiments to improve on ground and going forward, interest costs of companies will also come down. We expect a meaningful rate reduction over the next one year,“ says Pandey.

David Walker, managing director of SARE Homes, asserts that the rate cut by the RBI is a confirmation that inflation and future expectations of inflation are well within the RBI's comfort zone of 6 per cent. He maintains that the 25 bps cut in the repo rate is an inflection point and further cuts are expected in the future months. “This measure will definitely cheer up the markets and financial in situations will pass on this reduction to customers. This, in turn, will give buyers the confidence that with lower EMIs, property purchases will be more affordable, and now would be the right time to buy a home. This sentiment will help boost demand and stimulate growth,“ says Walker.

There is no denying that the RBI has surprised the entire country by cutting repo rate by 25 basis points to 7.75 per cent from 8 per cent, ahead of its February 3, 2015 policy review. Market analysts expect rates to come to a single digit after a long period of time. There is widespread expectation that the banks would lower the rates minimum by 0.25 per cent for new borrowers and this can go up to 0.50 per cent also. Rates are expected to come in the range of 9.5-9.8 per cent in coming few days for new home loan borrowers. Financial analysts maintain that if the inflation remains low, it is expected that the rates would come down by 1 per cent. They are, hence, advising the customers to take home loans on floating rates and expect rates to come down in the next 13 years.

More importantly, the reduction in rates will help the real estate industry in ensuring that the sales start rising. The big question, however, remains unanswered how far will the symbolic rate cut revive the home-buyers' sentiments? Analysts point out that the query can only be fully addressed in the upcoming Union Budget 2015-16, but this rate cut definitely shows the way forward as far as the direction of the Indian economy and the intentions of the policy makers are concerned.


  1. This decision will also boost stakeholder sentiments for capital comments.
  2. While a lower interest rate alone may not be a reason for celebration for the real estate sector, however, a definitive indication about its future direction is reason enough to put consumer sentiments at a higher pedestal and infuse a sense of optimism.

No comments:

Post a Comment