RBI’s Foresight to Strike Balance- Anchoring Inflation and Growth Velocity

Dr Niranjan Hiranandani

Hike in co-operative banks property loans limits by RBI by 100 % in its recent Monetary policy will act as an additional funding channel for real estate in rural areas and tier 2 and 3 cities along with an eye on banks to spread its retail lending portfolio. The focus on rural co-operative banks can be gauged from the fact that these limits were last revised for rural co-operative banks in 2009.

RBI’s action plan clearly indicates reprioritization to anchor inflation and fine balance growth velocity. Hardening up of interest rates with a twin rate hike in less than 40 days by 90bps was the move on the expected line. The high inflation rate persisting at 6 % and above for next few quarters is a real cause of concern globally amidst escalating geo-political rifts. The creeping up interest rates will have an immediate reflection on housing loan rates moving upwards to combat inflationary pressure.  This will crater the demand sentiment in the immediate run and may result in procrastination for home buying by fence sitters.  This indicates that actual sales conversion will have a longer time lag than before. Thus, the recovery in housing sales may experience a blip.

The robust residential property market recovering post the outbreak of Covid-19 was driven by low home loan interest rates, stamp duty reduction and incentives offered by real estate developers. The home loan rate hike will have its impact on residential sale in the short run, the expectation being that inflation will come under control once global supply chain is restored – in effect, normalcy will return. This will ease EMI burden

RBI has to walk on tight rope by balancing delicate tasks at hand. A corroborated approach with monetary as well as fiscal intervention will play a crucial role in growth sustenance and economic resiliency. Structural measures to manage supply side shocks with global supply chain disruption is a daunting task ahead for the Government.

Strong demand conversion undercurrents on the back of significant home ownership realization have been driving sales force. Real estate companies will play cautious and adopt a gradual price revision by keeping a watch on how the global discord unfurls and its rippling effect on the Indian economy.

In this context, the move to allow rural co-operative banks to extend finance to commercial real estate within the existing limit of 5 per cent of their total asset value will bring in more funding for real estate. This will also support developers of affordable housing projects, who have been struggling for finance.

Let us watch out how global events have a negative spillover on the cost of doing business and be agile in our strategic framework to overcome the headwinds. Real estate sector had staged a strong revival post covid pandemic and shelter being the basic need of humans. The sector  sounds very bullish in its long term growth prospects.

Dr. Niranjan Hiranandani is Vice Chairperson NAREDCO and MD Hiranandani Group