RBI Monetary Policy - Continued Cautiousness

Contrary to a wider perception that the policy rate will be cut by at least 25 basis points in the latest monetary policy, India’s RBI kept the repo rate unchanged at 6.25%. However, growth outlook for the current fiscal year 2016-17 has been lowered sharply from 7.6% y/y projected earlier to 7.1% y/y at the moment.

For the real estate sector, which is currently reeling under pressure from the recently-announced demonetization of high-value currency notes, a rate cut could have definitely allayed fears of a near-term loss of momentum. That said, even before the RBI’s announcement of its policy rates today, some banks have gone ahead and announced interest rate cuts on the back of improved liquidity in the system. This gives a lot of emphasis on the fact that the demand for mid-segment housing will continue to remain strong, since the salaried class predominantly uses bank loans to finance their home purchases.

Near-term disruptions in cash-sensitive sectors such as retail, hotels and restaurants are going to transiently impact demand for commercial space, although with fresh supply of cash these problems will cease to exist. However, if house prices are affected because of weak sentiment, overall consumption could witness an impact through the wealth effect, the possibility of which is uncertain at the moment.

What could offer the real estate community some respite is if the policy committee would continue to remain accommodative and act positively on any opportunity available for rate cuts as soon as they arise going forward.