Following five reductions in the repo rates, the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) in its sixth bi-monthly policy review of the current financial year, announced that the repo rate will remain unchanged at 5.15 percent. What could this mean for the struggling real estate industry? Find out -
The six-member Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) declared, in its sixth bi-monthly policy review of the current financial year, that it would keep the repo rate unchanged. The repo rate, the RBI’s short-term lending rate, remains at 5.15 percent in this review, bringing no respite to the dwindling real estate industry. This has come right after the Union Budget 2020-21, which too failed to cheer the realty segment.
The GDP growth for FY 2020-21 is projected at six percent, hovering in the range of 5.5-6 percent in H1 and reaching 6.2 percent in Q3.
With this announcement, the RBI has continued its stand from the previous policy review, where the repo rate was not changed. Shaktikanta Das, the RBI Governor, explained that with no change in the repo rate, it would allow the Central bank to ensure that the transmission of the current rate takes effect uniformly across public sector banks - nationalised as well as commercial banks.
The MPC observed that the national economy is currently weak with a negative output gap, while there is uncertainty over the inflation outlook. The previous spike in prices in December 2019 led to a surge in inflation past the upper tolerance band. The intent of the committee is to achieve the medium-term target of four percent Consumer Price Index (CPI) inflation within a bracket of +/- 2 percent.
Impact on real estate
With no change in the repo rate, there is no apparent relief in sight for the real estate sector. Home loan EMIs linked to external benchmark rates will remain unchanged, with no softening of home loan rates and ultimately, no boost in housing sales. There were five successive repo rate cuts in 2019 to bolster growth and infuse liquidity into real estate, but this time around, the MPC adopted a cautious approach.
Keeping a close eye on the inflation trajectory, the RBI needs to take complete account of the trickle down effects of the past rate cuts, before it can take a decision on introducing further repo rate reduction.
Giving his two cents on the move, Kaushal Agarwal, Chairman, The Guardians Real Estate Advisory, states, “The announcement is in consonance with expectations, keeping in mind the inflation and the key policy rate reduction of 135 basis points that were announced over the last year. The banks should now be pushed to pass on the benefits of the previous rate cuts that were announced by RBI to the consumers. This is essential to bring down the cost of borrowing for the homebuyers and provide an impetus to demand generation across the real estate sector. After a Union Budget session that was perceived to be neutral, the revival of credit growth needs to be the government’s top priority as it will play a significant role in demonstrating a resurgence of growth in economic activity.”
The industry reacts:
Ramesh Nair, CEO & Country Head, JLL India
The real estate sector has been particularly benefitting from previous rate cuts which were transmitted, to some extent, through mortgage rates and repo-linked loans to end consumers. This was reflected in the six percent YoY growth in residential sales in 2019. Moreover, the recently announced extension of benefits to both developers and homebuyers for affordable housing in the Union Budget is expected to maintain the growth momentum in the sector.
Jaxay Shah, Chairman, CREDAI National
The Policy announcement by RBI is thoughtful and encouraging as it will further boost the credit flow to the stressed residential realty sector. RBI’s decision to permit extension of date for commercial projects stuck for reasons beyond control of the developers under institutional debt will be instrumental in bringing much needed relief to developers. This is also significant in downgrading the assets by a year.
Anshuman Magazine, Chairman & CEO - India, South East Asia, Middle East & Africa, CBRE
The RBI decided to keep the repo rate unchanged at 5.15 percent and continue with its accommodative stance for as long as necessary to revive economic growth while ensuring that inflation remains within the target. The decision could be attributed to green shoots of economic recovery in the form of improved index of industrial production and core sector performance. While the recent Budget laid the long-term plan for the economy, the decision to not raise the repo rate in the face of growing inflation is an indication that the RBI is looking at the bigger picture of economic growth. This coupled with measures that were announced for real estate, MSMEs and HFCs are steps that will assist the Government and central bank in invoking investor confidence in the economy.
Rohit Poddar, MD, Poddar Housing and Development Ltd. and Joint Secretary, NAREDCO Maharashtra
RBI maintaining a status quo with an ‘accommodative’ stance with adequate policy space availability is a positive news for the overall economy. The real estate sector was expecting some stimulus after a subdued Budget. The policy rates have remained unchanged for the second time after consecutive reductions of 135 bps in 2019. The cash reserve ratio leeway for new consumer loans is expected to facilitate the transmission of monetary policy. The RBI has extended the timeline of the commencement for commercial operations for project loans, which is a big relief for the commercial segment of the real estate sector.
Pradeep Aggarwal, Founder & Chairman, Signature Global and Chairman, National Council on Affordable Housing, ASSOCHAM
The rate cut would have been the need of the hour to provide the much-needed boost to the real estate and to facilitate growth of the sector. However, the real estate, in particular, has been benefiting through policy interventions to stabilize the market. The country has a large number of potential buyers and any rate cut would have incentivized to improve their confidence. We look forward to the RBI’s decisions to lower rates in the future that will contribute to strengthening the GDP growth and create a robust economic framework.
Amit Modi, Director, ABA Corp and President-Elect, CREDAI Western UP
It’s a welcome move and now that it solves the banks liquidity issues, they will be encouraged to pass on the rates to end consumer even more proactively. Since it’s the liquidity in the economy that will upstart growth and employment cycle.The steps taken by RBI will boost GDP growth.
Manoj Gaur, MD, Gaurs Group and Chairman, Affordable Housing Committee, CREDAI
The decision by RBI to allow banks to deduct incremental lending that banks provide to productive sectors including residential real estate from net demand and time liabilities for the purpose of CRR is a welcome move. It implies that banks will have to more funds and it will also encourage them to lend more particularly to productive sector, which will have significant impact both on GDP and employment generation.
Ashish Bhutani, CEO, Bhutani Infra
This was a long pending demand of the industry and we are thankful to RBI for permitting extension of commencement date of projects, which are stalled for reasons beyond the control of developers by one year without classifying it as NPA. Needless to say, the move will help the commercial sector immensely as it means developers besides getting additional time to complete the project, may also become eligible to raise funds. The move will also help banks as they will have to shell out lower amount towards provisioning.
Harinder Singh,Chairman and Founder, Realistic Realtors
We welcome the Decision by the apex bank to permit extension of date of commencement of commercial operations (DCCO) of project loans for commercial real estate by another one year without downgrading the asset classification and no such loan will be classified as NPA. This move will benefit commercial Real Estate Sector vastly, specially the projects which are nearing completion and delays were outside the control of developers. This shall also motivate the developers to push the completion with in the extended period of one year, it's a great step in the right direction giving support to Reality sector and measures like this will surely help to pull the industry out of the toughest phase.
Abhishek Bansal, Executive Director, Pacific Group
Many of the projects including some commercial projects at times get stuck for reasons on which developers have little or no control. In this context, we welcome the decision of the apex bank to permit extension of date of commencement of commercial operations (DCCO) of project loans for commercial real estate by another one year without downgrading the asset classification. This means that such loans will not be classified as NPA and this would benefit commercial real estate segment immensely. The move will also help banks as they will have to do lower provisioning, thus increasing their capability to lend. The industry will eagerly await detailed guidelines on it.