The Reserve Bank of India's (RBI) Monetary Policy Committee (MPC) on Wednesday cut its key interest rate for the fourth successive time, reducing the repo rate by 35 basis points to 5.4 percent, in an attempt to get the economy off its sickbed.
The real estate sector has welcomed the RBI’s decision as they expect in expectation that the central bank's move will boost demand for affordable housing, but felt that this alone may not be sufficient to provide liquidity stimulus to the overall realty spectrum.
Moreover, experts from real estate industry also warned that the RBI's rate cut is unlikely to do much for mid-income housing in tier-1 cities, where the main concern is the unaffordable levels of property prices, not interest rates.
"If banks are able to pass on this reduction in the prime lending rate to consumers, budget housing demand may also improve further. The rate cut aims to encourage consumer spending in a scenario which has been rather gloomy, given the economic slowdown and declining consumption," said Niranjan Hiranandani, senior vice-president, Assocham and national president, Naredco.
To help the non-banking financial companies (NBFCs), the RBI has raised banks’ exposure limit to a single NBFC from 15 percent to 20 percent of tier-I capital of the bank. NBFCs can now on-lend to the priority sector through banks.
In addition to the repo rate cut, the MPC has also revised gross domestic product (GDP) growth rate to 6.9 percent from 7 percent.
“The current repo rate cut along with the downward revision of GDP growth from 7 percent to 6.9 percent, will surely improve the confidence of home buyers, encouraging them to opt for home loans, as banks will have higher room to transmit the rates, in the form of cheaper loans," said Amit B Wadhwani, co-founder of real estate consultant firm SECCPL.
"We believe that more banks will practice the revised rates, while lending. This will help sell the inventories at a faster pace, and it will also encourage developers for new launches,” he added.
Ramesh Nair, CEO and country head, JLL India said that the improved market sentiments due to the tax deduction schemes, modified tenancy laws, focus on implementation of
PMAY [Pradhan Mantri Awas Yojana], investment in infrastructure announced in the Union Budget 2019 coupled with interest rate deductions, is likely to boost sales in the residential segment.
"Moreover, credit re-structuring measures such as the introduction of repo-linked loans by some banks could sway purchase decisions of home buyers while enhancing transparency. However, the growth trajectory of the real estate sector ultimately depends on the successive transmission of rate cuts to the end consumers," he added.
Shishir Baijal, chairman and managing director, Knight Frank India, said that the liquidity crisis in the NBFC sector has been detrimental to the real estate sector.
"The RBI’s 35 bps rate cut is only marginal, especially so for the real estate sector. The NBFC liquidity crisis has severely choked credit availability for the industry, especially developers, as they struggle to raise even construction finance," said Baijal.
Farshid Cooper, managing director, Spenta Corporation said that the timing of the announcement will give the industry a fillip.
"The rate cut has sent a strong indicator to domestic banks to cut lending rates before the festive season kicks off which might prove to be beneficial to the sector," said Cooper.
"Raising bank’s exposure limit to single NBFC is a prudent structural development. Banks’ lending to registered NBFCs for housing up to Rs 20 lakh per borrower is a positive news for the real estate sector," said Rohit Poddar, managing director , Poddar Housing and Development ltd.
"Transmission of the rate cuts to borrowers is important as wielding scissors on repo rate alone won’t be enough. Additional interventions will also be required to try and provide a boost to the economy," Poddar added.
Ashok Mohanani, chairman, EKTA World is optimistic that RBI's initiatives will spur growth for the real estate sector specifically.
"Rate cuts will guarantee affordability in terms of home loans and thus lowered EMI, lower GST [goods and services tax], tax discount for the middle class as per as interim budget. Furthermore, we are also hopeful that the financial institutions will reduce the interest rates on construction finance," he said.
Manju Yagnik, vice chairperson, Nahar Group said “The question that now arises is that will the accommodative stance and 35 point rate cut from the MPC help the Indian economy to regain its pace. It will indeed bring along hope for several industries and sectors including real estate, but the true speculation lies in the purchase power of the common man and if he/she is willing to invest money in the market."
From an investment purview RBI has been the most aggressive in Asia in cutting interest rates and it is imperative that the benefits now reach the loan takers. If it does, the interest on home loans will be much more cheaper so this would be the apt time for homebuyers to take a loan for their dream home, she added."With surplus liquidity in hand and repo rate standing almost 110 bps lower at 5.4 percent from start of 2019, the transmission of aggressive rate cuts by banks should follow and spur credit growth propelling consumer spending hence bringing back healthier economic growth," said Parth Mehta, managing director of Paradigm Realty.