The world economies went into a knee-jerk halt due to the outbreak of the Covid-19 pandemic. From manufacturing to consumption, all economic activities abruptly came to a standstill. Central banks around the globe strived hard to bring the economies back into action, majorly driven by reducing interest rates.
Historically economies usually grow in a lower interest rate scenario as it allows more borrowing and purchasing power in the hands of consumers. On the hind side, since Return on Investment (ROI) is low, consumers prefer spending rather than investing. This trade-off leads to a surge in inflation.
As the world started coping with the new normal, pent-up demand in sectors like real estate, travel, and hospitality led to the economy’s revival. However, the global and domestic macro scenarios changed tremendously in the past six months. The Russia-Ukraine geopolitical issue, oil price shocks, supply chain disruptions, rising commodity prices, food inflation, etc., compelled Central Banks to take timely action to tame the inflation demon.
India faces many supply-side challenges, and prolonged rising inflation is detrimental to GDP growth. Monetary policy tools are one of the approaches to address the issue. During an unscheduled off-cycle Reserve Bank of India (RBI) meeting, RBI Governor Shaktikanta Das announced hikes in repo rate by 40 basis points and a cash reserve ratio (CRR) by 50 basis points. Though the timing of the announcement was a surprise, it was a much-anticipated move.
He emphasized that the monetary policy actions will continue to be accommodative while focusing on containing inflation spikes and re-anchoring inflation expectations to keep the demand intact.
Impact on Real Estate Sector
The real estate sector saw signs of revival since the festive season in the second half of 2021. The unsold inventory utilization increased, leading to new project launches across various parts of the country. Consumer sentiment remained upbeat, with demand picking in all segments, from affordable housing to mid-size homes to luxury apartments.
However, developers witnessed margin pressures due to rising commodity prices, construction material, and labor costs. The additional cost was not passed on to the buyers by most developers. Since the sector was just trying to get back on its feet post the pandemic shock, to aid the demand, developers had marginal or no hike in property prices which was the primary reason for margin compression.
For the consumer segment, EMIs will rise after the recent announcement. The industry also anticipates a few more rate hikes in the coming quarters, which will result in higher EMIs, putting pressure on homebuyers. However, this will not dampen demand immediately. Increasing interest rates, on the other hand, will result in higher returns on savings held in fixed deposits, increasing consumers’ purchasing power. Investors have been gripped by the lowest fixed-income rates in recent years, with this being the first rate increase since August 2018.
Absolute home prices rise over time as housing demand rises because it is a basic necessity rather than a discretionary spend. Buyers would rather buy now than wait and face the double whammy of higher property prices and interest rates later.
The Way Forward for India Inc
As we move towards the endemic, we need to embrace rate hikes as the new normal. The interest rate hikes by the US Federal Bank and the economic outlook by the International Monetary Fund (IMF) suggest that a higher interest rate cycle is a global trend that is here to stay in the near future.
The outlook for India Inc looks positive with higher affordability and disposable income in the hands of new-age investors. The real estate sector is expected to see higher traction from the demand and supply sides, with more significant government and private spending on infrastructural development.
(By Surendra Hiranandani, Chairman and Managing Director, House of Hiranandani)