Wednesday, September 19, 2007

Role of the Reserve Bank of India(RBI) in the growth and slowdown of the Indian real estate market

Before January 2006:

Home loans formed 11% of the total outstanding credit of scheduled commercial banks in March 2005, up from just 2.4% in Mar 1990.

The sales value of housing construction has witnessed an exceptional leap from Rs176.1mn in 1991 to Rs41.82bn in the year 2006.

Lower interest rate regime has played a pivotal role in the process.

After January 2006:

Reserve Bank starts raising interest rates to curb inflation and prevent the economy from overheating.

RBI has raised the repurchase rate or the rate at which it injects funds into the banking system, to 7.75 percent.

Since December, RBI has increased the cash reserve ratio by 2 percentage points to 7 percent to slow down loans growth.

Because of the hike in interest rates the eligibility of the borrowers has come down by roughly 28%.

The result is market has slowed down and home prices have dropped by 25%. But India's inflation has slowed to a two-year low.

Indian real estate: slowed down, subdued, tranquilized!

"The Reserve Bank of India (RBI) should immediately review its monetary policy to remove its excessive focus on taming inflation only and concentrate to reduce mortgage rate" said ASSOCHAM Past President and Chairman, DLF Universal, K P Singh while he was releasing the ASSOCHAM Study on `Reality Check on Real Estate’ with its President, Venguopal N. Dhoot.

''...because of mortgage rate and monetary policy, there is no doubt that the market has subdued at this moment temporarily,''K P Singh, in Hindu Business Line.

"I don't agree with the monetary policy and I want the interest rates to be reduced. The earlier they do it, the better." Singh, the fifth-richest Indian according to Forbes in March, said, in Bloomberg,"Due to the increase in the mortgage rates, the market is subdued and suppressed temporarily"

Related Story

"Sale of residential property dropped by over 70 percent in May-June 2007," the Associated Chambers of Commerce and Industry report

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