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CUT MAY GIVE FILLIP TO REVIVAL
The Times of India  |  June 10, 2019

Prabhakar Sinha

RBI’s rate cut on Thursday, the third one on the trot, if complemented by a Budget stimulus for the economy, especially for the real estate sector, can work wonders for the market as consumer sentiment would turn bullish, experts say

 

The RBI’s decision to cut policy rates by 25 basis points indicates softening of interest rates in the country, which augurs well for the interest rate sensitive sectors like real estate, especially housing, which is showing signs of green shoots. This is the third time in a row that the RBI cut policy rates by 25 basis points each.

 

CBRE South Asia Pvt Ltd, India’s leading real estate consulting firm, says the residential real estate is showing the much-awaited signs of recovery with seven major markets in the country registering an increase in quarterly new launches in Q1 of 2019. CBRE says the new launches and sales were rising with an annual increase of nearly 11% and 19%, respectively, in 2018.

 

However, it is argued that the real impact of rate cut would be realized if banks and financial institution pass on the benefit to end users.

 

“Transmission of the cumulative reduction of 50 basis points (bp) in the policy repo rate in February and April 2019 was 21 bp to the weighted average lending rate (WALR) on fresh rupee loans. However, the WALR on outstanding rupee loans increased by 4 bp, as the past loans continue to be priced at high rates.

 

“The situation seems to be improving now. The small transmission in the past is due to tight liquidity conditions in the banking system. But, it seems conditions have improved now,” a rating agency said.

 

Systemic liquidity in the banking system has improved and become surplus. Early June saw average daily surplus of Rs 66,000 crore, as opposed to deficit during April and most of May. The tightness in liquidity was due to leakage of cash into the system (currency in circulation had gone up), which is expected to continue to correct with the general election concluded. Not only this, the RBI has assured business community that it would continue to infuse adequate liquidity into the system.

 

Rajnish Kumar, chairman of the SBI, said the RBI’s policy decision to change the policy stance to “accommodative” will simultaneously help the financial system to navigate to a lower-term structure of interest rates and accommodate growth concerns. As economic growth has been hit and touched a five-year low of 5.8% in the quarter ending March 2019, the RBI has taken the onus to create an environment where high growth can be achieved. In a situation where inflation is likely to continue at around 3.3%, the present interest rate structure leads to very high real interest rate — in the region of 5% to 7%. The high-ticket size investment sector, like housing, is the worst affected owing to high real interest rates.

 

Jaxay Shah, chairman of Credai, said that besides repo rate cut, the accommodative stance which is a signal that the economy is back to business and the nation should look forward to a higher growth rate of up to 10%, is equally important. He said that the next step is to ensure that banks and financial institutions pass on the benefits of lower rates of interest to borrowers.

 

Niranjan Hiranandani, President of NAREDCO and co-founder and managing director of Hiranandani Group, said that a rate cut of 25 basis points by the RBI would provide momentum to the market, but more needs to be done to address the issue of liquidity.

 

“We are happy with the rate cut. Buyers who are coming back after the GST rate cut announcement, on affordable properties and those under construction, would be encouraged further with the reduction in bank rates. However, we feel that it is basically not enough to address the issue faced by all the other industries. It is not about ‘Dil Maange More’, but more about the need of the hour,” Hiranandani said.

 

“Liquidity is very low as the borrowing cost is still very high. This liquidity crisis is taking a toll on the health of companies and further inflicting financial damage, which affects the credit rating of companies and industries. Unless things are passed down, the NPAs of the banks will pile up,” Hiranandani said.

 

“The problems in the NBFC space, though, may warrant larger liquidity support from the central bank,’’ CRISIL also underscored. However, the rating agency says that expected healthy deposit growth and repo-rate cuts worth 75 basis points over the past five months are likely to result in the transmission of interest-rate benefit from banks to customers.

 

Anshuman Magazine, chairman and CEO of CBRE (India, South East Asia, Middle East & Africa), says: “The much awaited growth in the residential market has started to be visible now and metro cities like the Delhi NCR, Mumbai, Chennai, Hyderabad, and Bengaluru are showing signs of recovery. The sector has become more end-user driven and developers are increasingly factoring in the requirements of consumers.”

 

Magazine hoped that the rate cut would be coupled with a Budget stimulus for the economy, especially for the real estate sector, which would impact consumer sentiments positively.