Feb 22, 2013, 12.44 PM | Source: Moneycontrol.com

RBI rate cut to stimulate demand in housing sector: Expert

Given the tricky dynamics prevalent in the cash strapped economy, the RBI has a taken conservative yet mindful call by marginally slashing the key policy rates has been long commended nationwide throughout the realty clan.

Sumit Bharana, Director, Era Landmarks
Sumit Bharana
Era Landmarks

Given the tricky dynamics prevalent in the cash strapped economy, the RBI has a taken conservative yet mindful call by marginally slashing the key policy rates has been long commended nationwide throughout the realty clan. Analysts in the fraternity argue that the much awaited respite will by and large turn out to be a somewhat progressive step towards boosting and stimulating the demand in the housing sector as a whole.

Real giants have witnessed inventory pile up and unfinished projects owing to high borrowing costs. Individual buyers too have been fence sitting due to high rates and weak economic sentiments. Considering the sharp drop in housing demand, contrary to the marginal 25 basis point reduction, a 50 basis point would have alternatively been relatively desirable, signalling more powerfully towards a more facilitative environment, so to speak.

Besides, this sentiment lifter could potentially pave way for overseas investment in the sector to take place at higher scales as well. As reported by the sources end of last month, the repo rate has dipped down to 7.75 percent, clearly indicating a drop of 0.25 percent while correspondingly, the cash reserve ratio (CRR) by a similar margin is now down to 4 percent. This variation is known to have eased up a substantially enormous quantum of liquidity into the banking system, estimated at approximately INR 18,000 crores. The reduction, which is the portion of deposits that banks have to park with RBI, would improve the availability of funds. Some banks like Punjab National Bank and IDBI Bank have already cut their interest rates by a quarter of a percentage point. Other banks are also likely to follow suit.

A significant effect can be anticipated on home loans and car loans which are expected to get cheaper in the coming months. With the decrease in the interest rates, more number of individuals would be interested in applying for the loans since there would be a reduction in the cost of borrowing. This will in turn lead to an increased buying of homes and cars altogether giving a push to the real estate and the automobile sector.

The developer community now expects banks to pass on this significant advantage to end-users. The developers, as well as the consultants are fairly anticipative that the move will drastically bring the lending rates down for both the buyers on one hand and the builders on the other with equitable benefits for both. This ostensibly is an indication of investment in the sector to assume higher conduciveness as well. Additionally, it is also most likely to increase deployment in infrastructure and development projects.

For the same reason it appears as a monetary measure highly growth oriented in nature. More so, if the same is backed and powered by thoughtfully improvised fiscal measures on part of the congress lead UPA government in power, 2013 will then be a fairly promising year for the sector to assume a drastic boom. Some of such measures must include giving infrastructure status to the sector, allowing ECB for high-end housing and an increase of tax rebate on account of housing loans. The ideal situation however will shape up through creation of a robust supply to curb inflation which calls for a perpetual release in the whole fund supply position, month-on-month and quarter-on-quarter, particularly in the realty sector. Additionally, there is also a need to bring the high mortgage rates down so as to improve common man's affordability, which had been hit in past because of high inflation and interest rates that have been rocketing in leaps and bounds. On the whole, this bold stance on part of the Reserve Bank if backed by some economic initiatives taken by the government will not only work potentially as a sentiment booster on part of the investors and the developers in but bring about a whole new dimensional transition in the dynamics of the sector as a whole.    


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