8 December 2016

RBI MAINTAIN STATUS QUO ON REPOSITORY RATES – REALTY SECTOR LIKELY TO KEEP ‘WAIT AND WATCH’ MODE

News

During its fifth bimonthly policy review, the Reserve Bank of India (RBI) kept the repository rate unchanged at 6.25%. Repository or repo rate is the rate at which RBI lends to the commercial banks. Post-demonetisation, many analysts, had been expecting a rate cut by at least 25 basis points. A few state-owned banks, such as Canara Bank, have nevertheless reduced lending rates by cutting its one-year marginal cost of funds based lending rate (MCLR) to 9.15 from 9.30. Bank of India and Bank of Baroda, too, lowered their lending rates even before the monetary policy.

Research View

Despite a near consensus on rate cuts, the Reserve Bank of India (RBI) kept the repo rates unchanged. The primary reason for this decision was the inflationary pressure and uncertain global scenario arising from Brexit, Trump’s victory and the Italian referendum. The real estate sector, which has been negatively impacted by the demonetisation drive was expecting a relief in the form of a lending rate cut.  Since 8th November there has been a general fear in the market that real estate prices will fall significantly, especially for land and residential units. To counter this, some developers are assuring their buyers with price protection in the event of fall in their project rates. Whether these strategies will bring the buyers back is uncertain but the current decision of RBI has failed to provide any clarity to the current scenario. While disappointed with the RBI’s decision, we expect banks to lower lending rates because of increased liquidity, which will somewhat cushion the negative impact of demonetization. In our opinion, transaction volumes will remain low in the short-term as the buyers are likely to maintain the wait and watch strategy for some more time. However, we do not foresee significant fall in residential prices.

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