Jan rate-cut on the cards; pan-India realty prices up: Keki

Keki M Mistry, VC and CEO, HDFC explains on CNBC-TV18 that there is an increased likelihood of a RBI cut in rates in January 2013 and across India, realty prices have moved in line with inflation.

Below is an edited transcript of the analysis on CNBC-TV18 Q: The Reserve Bank of India (RBI) has announced that it will keep the market well-supplied with liquidity and that now the conditions are propitious for a rate cut in the policy review on January 27. The central bank also reiterated that the focus has now very clearly shifted to growth. What does this mean for the interest rate market?
A: I still hold the belief that there will definitely be cuts in interest rate-cuts in 2013 and I continue to believe that interest rates in 2013 will almost certainly be lower compared to rates in 2012. Q: Do you think the market will discount that promise and go ahead and soften yields already?
A: Short-term rates are already getting softer. Short-term rates at current levels compared to levels six months ago, are certainly lower even though the rates tended to inch up in the last one-to one-and-a-half months. So to some extent, short-term rates have reacted to the fact that inflation has been coming down and therefore it is only a matter of time that RBI actually starts cutting rates.
My view has always been that by the time we get to March 2013, the RBI will again cut rates by about 50 bps. And there would be more rate cuts to follow starting April, unless there is some unprecedented change. My personal worry has always been regarding oil because we are such a large importer of oil and a very sharp spurt in oil prices, because of events which we have no control on, will have impact either the fiscal deficit or inflation. Q: From the RBI's commentary today, it seems like it just stopped short of announcing an initiative. Do you think the risk of the events to defuse the fiscal cliff in the US may be one of the reasons that the RBI may be on a wait-and-watch mode and decide once the outcome is known?
A: That may have been one of the factors that RBI considered while taking the decision. But apart from that, I really don't think there were expectations of a rate cut in December, fiscal cliff or no fiscal cliff because inflation still is 7.24 percent. There is no dramatic event that is going to happen now in December or January.
We have a credit policy coming up in a month's time which allows time to take stock of the situation and address the problems. However, there is not much that can be done now over the next 15-20 days because business activity is slow.  But January is a really critical month and a cut in rates in January will be a huge sentiment-booster. Q: Do you see already any improvement in demand because real estate stocks perked up rather considerably? What are the trends in the realty sector in terms of demand for loans, property and home loans, and pick-up in home sales and prices?
A: In the first six months of the financial year for which the results are public and we have guided towards a growth of 18-20 percent after adding back loans sold in the last 12 months, the actual growth in the first six months was 31 percent on individual loans. The average loan-size is Rs 21 lakh and customers are buying houses to stay in and not to invest speculate- they are actually end-users.
The slowdown is more concentrated in certain pockets like for example, in Mumbai. Mumbai continues to see a slowdown but even in the last couple of months, demand has started picking up. But Mumbai's slowdown is more a results of the fact that for a year-and-a-half, very few projects were approved. And therefore there was not much of supply in the market and therefore the limited supply was available was at very heavy prices.
So that's specific to Mumbai. But property prices across India have been in line with inflation. Other estimates from borrowers indicate home prices having risen by about 8-9 percent in the last one year compared to what they were earlier on a pan-India basis.
There are pockets where the increase is faster or lower. But we haven’t seen any big drop in prices unless and until the infrastructure in big cities improves dramatically. Look at Mumbai for example. It is very difficult for property prices in Mumbai to come down because the demand for property is always going to be strong. So any drop in prices is going to create that much more demand and therefore there is little room for any big drop in prices.
The only solution is huge investments in infrastructure offering more schools, colleges, health centres, medical facilities, hospitals and bridges that enables easier communication and commutes. But these are very long-term projects.