RBI status quo on credit policy

Need to introspect

The central bank treads cautiously by maintaining a status quo on the credit policy, says Shilpa Sachdev

Against the expectations of the market, the Reserve Bank of India kept the repo rate and the cash reserve ratio unchanged at 8% and 4.75% respectively in its recent credit policy. The real estate sector was hoping for a boost from the government in the form of some relief in the benchmark rates to ease the liquidity and fuel the sector's growth. But with the stance taken by the RBI, experts feel that the country's apex bank could have done better on monitoring the issues facing the economy.

Expressing his disappointment, Paras Gundecha, President of MCHI-CREDAI, states, "It seems the RBI is undermining the importance of the real estate sector in India's economy and GDP. The real estate sector plays a vital role in generating employment opportunities and accelerating the growth of the nation. Being the financial hub of the country, the real estate sector in Mumbai will be negatively impacted by the RBI's status quo."

Inflationary pressures and a policy logjam have impacted the momentum of the real estate sector, which was hoping for the government to announce some measures to support the sector.
According to Lalit Kumar Jain, National President, CREDAI and CMD of Kumar Urban Development Ltd (KUL), the status quo on interest rates will further dampen the sentiment though the RBI may justify its action. He says, "The RBI appears to be sadly ignorant of the importance of the real estate sector in the national economy and GDP. The capital and labour intensive sector plays a key role in employment generation and accelerating growth."

He recalled that the encouragement given to real estate in 1998 had kick-started the growth of cement and steel industries along with over 165 other industries, including transport, with no additional cost incurred by the government. Jain adds, "The risks attributed to real estate and the RBI advisories against lending to real estate have only harmed the sector and made housing costlier for consumers. I hope further policies see rate cuts positively and the conservatism does not become a lasting attitude."

Similarly, Shailesh Puranik, MD, Puranik Builders Pvt Ltd, says, “We are hopeful of some positive steps by the RBI in the future to strengthen the overall market sentiments in the real estate sector.”
 Pranab Datta, Vice-Chairman and Managing Director, Knight Frank India, says, "The May inflation data seems to have prompted the RBI to adopt a cautious approach and maintain status quo, despite all-round expectations of easing liquidity and lowering interest rates.  For the realty industry, battling sluggish conditions for quite some time, the decision means that the hostile environment will extend further and pre-empt any respite to the industry stakeholders."

The main concern for both buyers and developers is related to the inflationary trends that still persist in the economy, as their finances get impacted on a much bigger level.
Explaining his view point, Sanjay Dutt, Executive Managing Director, South Asia, Cushman & Wakefield, shares, "From the point of the real estate sector, a further rate cut would have resulted in positively influencing the sentiments within the sector. However, reduced CRR and Repo/Reverse rate cuts do not automatically translate into reduced interest rates for mortgages, which would have pushed the sales volumes in the residential section up higher. Banks have to take into account other factors before deciding on lowering their interest rates for retail customers. For developers, in any case, financing options from the banking industry have been restricted since some time and they have had to mainly depend on other sources such as ECBs and PE investments.”

However, Dutt adds, “Our outlook for the sector remains cautious, but still positive as there are transactions still taking place at a sustainable pace and volume."

Though the RBI's decision hints towards a cautious approach, experts feel that the current situation in the economy and industry needs deeper introspection by the RBI and the Government. Chandrajit Banerjee, Director General, Confederation of Indian Industries, says, "It is quite evident that space for fiscal maneuverability is limited given the very large fiscal deficit and it is also apparent that the inflationary pressures being alluded to are results of structural problems on the supply side. It needs to be understood that with a steadily declining GDP growth, millions of livelihoods are under threat and therefore, a very inflation centric policy measure appears to have missed the bigger picture, when CII was hoping to see a coordinated action from the RBI and the Government to stem the slide in economy."