In his first full-fledged review of the monetary policy, Reserve Bank of India (RBI) Governor Raghuram Rajan stuck to the continuing hawkish stance of inflation control first, which has seen the repo rate go up by another 25 basis points. The repo rate is the rate at which the central bank lends money (liquidity) to the financial system, and is the key policy rate. After the RBI action on October 29, it stands at 7.75 per cent.
The most rate sensitive sector that always watches the central bank’s action closely is real estate. Equated monthly instalments (EMIs) are the biggest expense for a typical household, and with the floating interest rate regime, any increase in the policy rate has a potential effect of pushing EMIs upward, although it is banks that take the final call.
This time, the RBI’s review of the monetary policy has coincided with the festive season an important period for the real estate sector, for most home buyers seal the agreement for purchase typically during the second half of the calendar year, which is when most festivities take place.
The real estate sector is saddled with huge inventories, stretching up to four years — that is the time it would take to offload all those apartments at the current absorption rate.
“Pan India inventory is now well above the comfort level of 14-15 months. Mumbai has an inventory of close to 48 months, Delhi of 23 months and Bangalore of 25 months. These are close to the levels of 2007, when the residential real estate market inventories were at an all-time high,” says Santhosh Kumar, CEO-Operations, Jones Lang LaSalle India.
Projects are routinely delayed and funding is starved as the cost of liquidity is high. As a recently released report by global property consultant Knight Frank put it, “The ailing real estate developers have been caught in the trap of ambitious expansion, decelerating sales, hardening interest rates and weakening cash flow.”
Given this already bleak scenario, what is the likely impact of the latest inflation control measure of the central bank? As most industry players put it, not very good.