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India's Central Bank Repo Rate Stifles Market

By Phil Butler | July 27, 2011

A higher than expected lending rate hike by the State Bank of India, the country's biggest lender, has markets reeling. India's stock market fell this morning on the news of a point 5 percent increase, twice was was anticipated be experts. Sensex dropped some 353 points to 18.518, while the Nifty closed 105 points lower at 5,574. The Repo rate hike stands to stifle Indian recovery, according to some experts.

India's Central Bank raises rates double the expected amount

RBI raises repo rate twice what was expected

The massive selloff today stands to hurt key sectors of the India economy including; real estate, banking, auto and other capital goods sales, and in the long term - some believe, the overall recovery. Four key bank stocks, HDFC ,  HDFC , ICICI Bank, and  SBI lost a huge percentage of the total Sensex fall.
Already, the real estate sector is a buzz over a hike that will further exacerbate the situation there. Poor sales and high input costs have already dampened the property market of India, and RBI's unexpected extra hike points will only make things worse. Pradeep Jain, Chairman of the Confederation of Real Estate Developers' Association of India (CREDAI), told reporters:

“Unless steps are taken to improve supply system, this increase by RBI is going to have a minimal effect on inflation. While we were expecting a moderate hike of 25 bps, the 50 bps raise is going to dampen growth. This will make cost of funds expensive for both developers and buyers, coupled with constant increases in input costs, making the business environment very complex across industries.”

The bottom line here is, residential buyers are going to be hit hardest by these rate hikes. This is bad business where sales are concerned. The margin for smaller banks is going to be even worse, and cities where purchase rates and prices are highest will be hit hardest. Workers just able to float loans across India, will now be shut out. So, while RBI may recoup margin at one end, a massive loss overall could take place. RBI's hike only makes sense if the overall market - mid to long term - recovers.

Lalit Kumar JainLalit Kumar Jain (right),  National President CREDAI, pointed out that the needed housing development funding for the next few years there in India, exceeds $3.2 trillion dollars US. In effect, RBI's move may have far more dramatic ramifications than even experts predict. This is a case of too much, too soon for many.

The Reserve Bank of India (RBI) has basically used a shotgun to kill the mosquito of inflation here. Now, asset quality may further detirorate  as sensitive sectors respond to this unexpected twist. Commercial real estate, for one, is particularly subject to over scrutiny and key quality issues.

Most Indian banks showed a decline in net interest margins in their June earnings statements, and this is one huge indicator of profitability for banks. RBI's move would seem to be putting the squeeze on many banks and other lending institutions there. While most banks do not fear for the long term, almost all suggest the market will become compressed over the short term. We will have more as the news comes in.

We leave you with


Phil Butler is a former engineer, contractor, and telecommunications professional who is editor of several influential online media outlets including part owner of Pamil Visions with wife Mihaela. Phil began his digital ramblings via several of the world’s most noted tech blogs, at the advent of blogging as a form of journalistic license. Phil is currently top interviewer, and journalist at Realty Biz News.
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