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RBI Policy Rate Hike Could See India Property Prices Increase

By Mike Wheatley | October 29, 2011

The price of family homes in India is set to increase after real estate developers announced that the costs associated with the decision by the Reserve Bank of India (RBI) to raise policy rates would be passed onto home buyers.

India home prices

India increases policy rates; housing expected to be hit © Anna Polishchuk -

The RBI took the decision to raise policy rates last week in order to fight inflation in the country, which is threatening to reach double digits. Rates were hiked by 25 basis points, meaning that borrowing rates (reverse-repo) and short-term lending rates (repo) are now at 7.5% and 8.5% respectively.

Pradeep Jain, the chairman of the Confederation of Real Estate Developer’s Association of India (CREDAI), said that although he understood the situation, the Reserve Bank had put developers in a sticky situation and that they had no choice but to pass on the costs:

“It is a vicious circle of higher input cost, higher borrowing cost and higher property prices. We are bound to pass on the increased cost of borrowing funds to our customers.”

The increase in policy rates would make it harder for people to obtain credit to buy homes in India, added Jain. However, he did say that demand is unlikely to be impacted despite the increased costs, as the fact remained there is a huge shortage of housing in India:

“But we urge the apex bank...not to hike rates any further as that will certainly choke industrial output, thereby putting a halt to economic growth.”

The president of CREDAI, Lalit Kumar Jain, expressed similar sentiments to his colleague, reported the Times of India:

“Frequent rate hikes would prove to be counterproductive, as the move will have a cost-push impact rather than proving to be an inflation control measure.”

Kumar Jain added that interest rates in the country are sure to rise, something that would weaken demand for property even further. He called for the government to launch reforms in real estate, including a single window clearance system and more transparency.

Meanwhile, Gaurav Mittal, MD for CHD Developers, one of India’s biggest property companies, said that negative sentiments about the country’s real estate markets had been fuelled by numerous rate hikes in recent months.

He added that monetary measures would not be able to correct the rise in input costs, which he said was a supply side issue. However, he also saw reason for optimism, saying:

“Certain segments of real estate market especially the luxury segment has been slow. However, the mid-segment residential sector is strong and will continue to show growth in the time to come.”

Earlier last week, Sanjiv Saddy of the Emaar MGF Land Executive had urged the RBI to refrain from hiking up rates as “such an action will not help real estate to get out of the quicksand it’s in.”

He cautioned that, contrary to helping the economy, the extra burden faced by the real estate industry could well lead to a financial collapse and recession in India.

Mike Wheatley is the senior editor at Realty Biz News. Got a real estate related news article you wish to share, contact Mike at [email protected].
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