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RBI Monetary Policy: 25 bps rate cut insufficient to revive real estate demand

Another 25 basis points reduction in repo rate, announced by the Reserve Bank of India (RBI) on Friday, is insufficient to revive real estate demand as banks have not transmitted the benefits of previous rate cuts to home loan borrowers.

The fifth consecutive rate cut this year has brought the repo rate down to 5.15 percent. “In light of the ongoing economic distress in the country, the 25 basis points cut in policy rate is short of expectation. It is insufficient to support the flagging consumer demand,” Shishir Baijal, Chairman & Managing Director, Knight Frank India, said.

Anuj Puri, Chairman, Anarock Property Consultants, said while the cut can go some way in improving consumer sentiments ahead of the festive season, much depends on how efficiently banks transmit the benefits to borrowers.

Also Read: RBI begins policy review meet; rate cut on cards to boost economy

“An efficient transmission will lower the cost of capital not only for consumers but also for developers, making room for price revisions and further discounts. Some banks have agreed to link their lending rates to the repo rates, but all major lending institutions need to follow suit,” he said.

The government has been trying to revive the sector with multiple measures including a reduction in GST to 5 percent from 18 percent announced earlier this year. It has also announced the setting up of a Rs 20,000 crore stressed asset fund to complete stalled projects in the affordable housing category.

Surendra Hiranandani, Chairman and Managing Director, House of Hiranandani, said the wave of next gen reforms has set the stage for years of high growth for the real estate sector. “However, the growth trajectory of the real estate sector will depend on the successive transmission of rate cuts to the end consumers.”

Also Read:Repo rate cut to ease liquidity, boost sales for real estate sector

Moreover, the stressed real estate sector was looking forward to a bigger rate cut and sector specific lending provisions to improve both liquidity scenario and consumer spending ability.

A slew of factors such as slowing economic output, rising unemployment rate and low consumer confidence have hindered the percolation of these small quantum rate cuts to the economy at large. “A cumulative 110 bps repo rate cut over the last 6 quarters has failed to stimulate consumer demand as well as private investment in the economy,” Baijal noted.

Puri said at a macro level, the overall stress that Indian real estate is in cannot be remedied merely by reduced lending rates as the sector has been reeling under subdued demand for many years with high levels of unsold inventory as well as stalled projects.

With an unsold inventory level of 42 months across India, developers will need over three years to sell the existing stock. Alongside, the non-banking financial companies (NBFC) liquidity crisis has severely impacted the credit availability for the industry, especially developers, as they struggle to raise construction finance.

Also Read: RBI policy: Why repo rate cut is unlikely to stir housing demand

“Lack of liquidity stimulus will only worsen the situation further. Therefore, a substantial rate cut to reinvigorate end consumer demand and intervention on real estate sector specific lending provisions could have been a better intervention at this juncture,” Baijal said.

While the RBI and the government have taken several measures to aid the supply side in the recent past, it is the weak consumer sentiment and spending inability that is the fundamental problem of the current economic slump.

“Unless meaningful initiatives are taken to propel consumer demand, these supply side interventions may not meet the desired goal of economic revival,” Baijal added.

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