RBI disappoints real estate sector, hikes repo rate by 25 bps over inflation worries
With a continued stance to keep a check on high inflation, the Reserve Bank of India raised repo rate by 25 basis points (bps) to 7.5 per cent in its mid-quarter policy review on September 20. In his debut policy review, RBI’s new governor Raghuram Rajan surprised the markets by raising interest rates to clamp down on high inflation. The RBI in ts announcement on September 20 reduced the marginal standing facility(MSF) rate by 75 bps from 10.25 per cent to 9.5 per cent and lowered the minimum daily maintenance of the cash reserve ratio (CRR) from 99 per cent of the requirement to 95 per cent of the requirement.
The announcement by RBI did not bring any cheer to the real estate sector. The BSE realty indices plunged by over 7 pe cent after the policy announcement. Shares of real estate companies like DLF, Unitech and Oberoi Realty were trading in negative.
Commenting on the policy review, Anil Kumar Sharma, president, CREDAI-NCR said, “The measures adopted by the new Governor reflect concerns on inflation front and efforts to ease liquidity situation and will not help the real estate sector, at least immediately. The increase in repo rate is definitely disappointing considering subdued realty market. But by reducing the CRR marginally and the MSF rate, the Central Bank has made efforts to infuse liquidity in market. Even though these measures seem “hawkish” at the moment, they have underlying potential to streamline the health of economy in general and real estate sector in particular in long run.”
Real estate industry after the announcement expects that an increase in construction and borrowing cost cannot be denied now. “With the proposed Real Estate Regulatory Bill, where developers are expected to keep considerable portion of sales in escrow account for majority of construction period, finance cost for developers is expected to increase. This, along with increase in cost of construction and the already challenging economic scenario, is expected to affect profit margins of developers. In such a scenario, the real estate industry was obviously hoping for relief from the RBI by way of reduction in financing cost.” said, Anuj Puri, chairman and country head, Jones Land Lasalle India.
Private developers point out that the announcement will hurt buyer and developer community. Pradeep Jain, chairman Parsvanth group said, “It is highly disappointing to see such a signal from RBI. Though increasing repo by 25 bps may curb inflation marginally or may hold rupee for a while, it is going to impact market sentiments significantly. Such step is more surprising when we put the US Fed’s liberal reforms in context. The RBI had a golden chance to instigate positivity in an otherwise sluggish economy; this increase in rates is a blow to the growth prospects. It is not a good signal for the industry which is about to enter the festive season. Banks have already started raising their rates. This is going to hurt both buyers as well as developers.”
“With the hike in repo rate, our wait for some kind of help from the apex bank has stretched further. The real estate market has had huge expectations from this review by the new regime at the Central Bank, but it seems that the RBI wants to create conducive environment before pushing for growth in overall economy. The intend to reduce pressure of inflation will ultimately benefit the realty market.” said, Harindra Nagar, Managing Director, Paras Buildtech.
With the festive season approaching the real estate sector was hoping some relief from the RBI but the policy announcement did not bring any relief for the sector. Sanjay Dutt, executive managing director , South Asia, Cushman and Wakefield, said, “For the real estate sector, the increase in the repo rate is going to have some downside in a stressed environment that is already plagued by slowdown in sales, increasing input costs, liquidity issues and high costs of capital.
However, it is the Government’s job to tackle these issues by implementing necessary reforms that ensure speedy development of infrastructure necessary for growth of the markets, improvements and more transparency in the regulatory processes, improved access to funding sources for both developers as well as buyers and better regulation of the industry on the whole and better management of the economy by Government of India.”
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