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FIGHTING GLOBAL HEADWINDS

FIGHTING GLOBAL HEADWINDS

Persistent repo rate hikes have not dampened domestic demand for and NRI interest in resilient Indian real estate

BY VISHAL DUGGAL

In response to elevated inflation levels due to geopolitical tensions, the Reserve Bank of India (RBI) has increased the repo rate successively quarter over quarter in the current financial year. The hikes, four times in a row, have been necessitated by the spiralling inflation and worldwide recession in the financial markets.

To rein in the persistently high inflation, the RBI decided to raise the key policy rate in an off-cycle announcement on May 4, 2022. The apex bank effectuated a 40 basis point increase in the repo rate, bringing it to 4.40 percent. In a virtual briefing, RBI Governor Shaktikanta Das announced an increase of 50 basis points in cash reserve ratio, to raise it to 4.50 percent. Subsequently, on June 8, the RBI increased the repo rate by 50 basis points. The hike brought the RBI’s short-term lending rate to 4.90 percent. The move ushered in the end of a record low-interest rate regime which was established by the RBI to ease economic hardship in response to the Covid-19 crisis. To mitigate the impact of the pandemic and preserve financial stability, the Central bank had slashed interest rates, keeping the policy repo rate at a low of 4 percent.

But the worsening global macroeconomic situation in the wake of the Russia-Ukraine war changed it all.

On August 5, the RBI increased the repo rate by 50 basis points. The move brought the RBI’s benchmark lending rate to 5.40 percent, making home purchases costlier for prospective homebuyers. The decision also resulted in housing EMIs going up for existing borrowers.

In view of the heightened geopolitical risks, the RBI’s Monetary Policy Committee (MPC) in its meet on September 30 again increased the repo rate by 50 basis points to bring it to 5.90 percent. This marked the fourth time the central bank increased the repo rate since May to combat stubbornly high inflation driven by increase in food prices including cereals, vegetables, pulses and so on, and additional inflationary pressures emerging from steep depreciation of the rupee.

For the uninitiated, the repo rate is the rate at which the commercial banks borrow from the RBI. An increase in repo rate leads to a hike in the lending as well as deposit rates. Basis points (BPS) are used to show the change in the value or rate of a financial instrument, one basis point equals 1/100th of 1 percent, or 0.01 percentage point.

The consecutive repo rate hikes over the past couple of quarters, leading to rising interest rates, have added to buyers’ overall acquisition cost. Coupled with elevated property construction costs and product price pressures, the high interest regime threatens to adversely impact real estate sentiment, predominantly on the affordable housing side.

The increases in repo rate have prompted banks in India to start a rate hike cycle. It has impacted all borrowings including home loans, car loans, business loans, personal loans, vehicle loans, credit cards and various other loans disseminated by banks and other financial institutions, leading to increased EMIs for consumers.

Central banks across the world including the US Fed have taken similar measures to counter inflation risks amidst geopolitical tensions, and tightening global financial conditions. However, as far as India is concerned, the repo rate hike has not adversely affected the overall consumer spending, or disrupted the entire supply and demand chain. Growing geopolitical uncertainties have not impacted the broadbased recovery of the Indian economy that has been witnessed recently. According to a State Bank of India (SBI) report, the RBI seems “focused on withdrawal of accommodation to ensure that inflation remained within the target going forward, while supporting growth”.

Despite slowing exports amidst considerable tightening of global financial conditions, the Indian economy is supported by improvement in private consumption, steady improvement in industrial activities, a favourable monsoon, rebound in the manufacturing and services sectors, a relatively better placed agriculture sector, strong growth in bank credit, and optimistic business outlook. Other positive factors include increase in government spending and low risk of fiscal slippage confronting India despite additional subsidy, due to improved tax collections.

According to experts, notwithstanding the recent hikes in key policy rates, loan affordability is still quite good. Historically, the repo rate in India has been between 6-8 percent, and currently it is at 5.90 percent. So, the buying capacity of consumers has not been grossly undermined. According to Surendra Hiranandani, chairman and managing director, House of Hiranandani, “Despite the RBI’s strategic decision to raise repo rates in an effort to control inflation, the buyer of real estate seems to be less influenced by the most recent increases. Higher premium sales levels are the result of rising demand for larger properties, a recovery of buyer confidence, and greater NRI interest.”

Significantly, the latest CII-ANAROCK Consumer Sentiment Survey shows that Hyderabad, the NCR (National Capital Region), and Bengaluru are NRIs’ top picks for housing investment. Notably, at least 60 percent of NRI respondents will buy homes in one of these three cities, with 22 percent focused on Hyderabad, 20 percent eyeing the NCR, and 18 percent preferring Bengaluru.

Notably, more NRIs prefer investing in Indian real estate over stocks, mutual funds, gold, and fixed deposits. In the survey’s current (H1 2022) edition, 71 percent of NRI respondents saw Indian housing as the best investment bet. This is markedly higher than the 55 percent in the pre-Covid edition. “Despite the worst of Covid-19 now in the past, NRIs have clearly not forgotten the uncertainties associated with living in a foreign country during a major pandemic,” says Prashant Thakur, senior director and head – research, ANAROCK Group. “Securing homes in India became, and remains, a priority for Indians everywhere. While domestic homeownership sentiment remains strong despite hardening home loan interest rates and property prices, the depreciating rupee value against the US dollar gives NRIs a distinct advantage.”

Housing has seen a 15-20 percent increase in NRI demand in the first nine months of 2022 compared to the corresponding period in 2021. “As per ANAROCK Research, the January- September period of 2022 saw approximately 2.73 lakh homes sold in the top seven cities,” says Thakur. “On an average, NRIs account for 10-15 percent of homes sold in any given quarter.”

The current H1 2022 survey finds that over 77 percent of NRI respondents will buy bigger homes—54 percent favouring 3BHKs and 23 percent looking to buy 4BHKs. Just 22 percent of NRI respondents are now looking for 2BHKs. In the pre-Covid survey, at least 40 percent were eyeing 2BHKs.

Many NRIs are now looking to shift back to India and actively use these homes. The current economic situation in many countries is uncertain because of the recessionary dynamics brought on by the Ukraine-Russia war, while the Indian economy is markedly better off, concludes the CII-ANAROCK survey. All this bodes well for buyers of Indian properties living within the country as well as overseas.

Tags: #economy#expatindians#flavours#globalindians#india#IndianDiaspora#indianeconomy#indiansabroad#moneymatters#news#NRI#pravasindians#trending#worldnews
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