Rate cut Is Fine, it’s Prices that Matter

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SummaryThe central bank’s slashing rates would offer the existing borrower a marginal benefit.

The central bank’s slashing rates would offer the existing borrower a marginal benefit. But for the real estate industry, it is only the right price point that can attract buyers

You may not deal directly with the Reserve Bank, but what we do, touches your life every day,” says Governor D Subbarao in the advertisement commemorating the central bank’s 75th anniversary.

There is one occasion where the central bank touches people’s lives to a greater degree and that is when it eases interest rates, which it did on Tuesday. After maintaining the status quo over the last nine months, it relented and cut the repo rate by 25 basis points or 0.25 per cent. The rate, which now stands at 7.75 per cent, is the cost at which the central bank lends money to banks and forms the benchmark of the country’s financial system.

This drop usually means that banks pass on the benefit to their borrowers, reducing the interest burden on loans. This in turn draws more borrowers. The RBI action is estimated to inject Rs 18,000 crore into the economy. “Banks have an urgency to increase their credit growth, so they will be looking at all opportunities, either through reducing base rate or some segments where they can lend better” said Pratip Chaudhuri, chairman, State Bank of India. The country’s largest lender reduced the base rate by 0.05 per cent on Wednesday.

The one constituency that looks forward to such an announcement are the home loan borrowers on the floating rate, for it means a breather on the EMI front.

“RBI’s action was on expected lines. The repo rate reduction will facilitate banks and housing finance companies to reduce home loan rates marginally which will benefit consumers,” says S. Sridhar, Advisor RICS-South Asia and former chairman, National Housing Bank.

Following the RBI decision, the National Housing Bank (NHB), the regulator and refinance provider to housing finance companies also slashed its lending rates by 0.25 per cent.

A home loan borrower would stand to gain marginally as illustrated in the table. For a loan amount of Rs 20 lakh at 12 per cent interest, the EMI currently payable is Rs 22,022. At a 25 basis point cut, the EMI on the same amount is Rs 21,674, a difference of Rs 348, or Rs 17 per Rs 1 lakh of loan amount.

“Our Assets Liability Management Committee will examine as to what extent and to what percentage, benefits can be passed onto the customers,” said VK Sharma, director and chief executive, LIC Housing Finance. When asked if the revision will only be for new customers or existing customers too, he said, “We will review the prime lending rate and the benefits will be passed to all.”

The rate cut, however, would not necessarily mean that the liquidity tap has been opened for the real estate sector. “Of course, each lender will have to take a view based on respective asset-liability management and margin position. However, one is not sanguine about increased funds flow to the real estate companies as the issue is not merely one of liquidity but related to the portfolio quality,” says Sridhar.

For real estate companies, the only way to attract liquidity into the system seems to be to pin their hopes on prospective buyers queuing up at the sales counter. “The signal will serve as a boost for the sector with sentiments of buyers turning favourable. Banks may pass on the benefits to the consumers by easing off the lending rates. Home loans may get cheaper, facilitating the buying decision of the consumers,” says Gaurav Mittal, Managing Director, CHD Developers.

“The industry expects more such steps to improve liquidity and reduce interest rates to increase investments,” says Anshuman Magazine, CMD, CBRE South Asia, a real estate consultancy.

Fund flows to the real estate sector are drying up. The much-touted investment avenues such as real estate investment trusts and real estate private equity have not taken off as expected. Recently, the RBI said it did not favour the granting of industry status to real estate — a key demand of the sector for that would enable funds to flow easily.

Which leaves the only avenue: the buyer who bears most of the burden of financing a project and the only channel for reliable cash flows for a developer. The rate cut would provide a marginal benefit, but can do nothing to address the core issue: high prices.

“A sharp revival in the fortunes of the industry will be accelerated if the demand resistance arising from high prices of housing can be addressed through more affordable prices,” says Pranab Datta, chairman, Knight Frank India.

Until that happens, the prospective buyer may have to remain a fence sitter on the lookout for a good investment opportunity.

(With inputs from Sandeep Singh)

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