Repo hike: It’s double whammy for property developers

By CL Jose

Repo rate hike to jack up EMIs of home loans

KOCHI/May05-2022:The 40 basis points (bps) hike in repo rate to 4.40 per cent effected by the monetary policy committee (MPC) on May 4 has dealt a sucker punch to the real estate developers who have been lying low for the past more than two years waiting for an early revival of the sector.

The repo rate increase will inevitably push up the borrowing costs for the prospective property buyers. The interest rate increase could render a body blow to the sector which currently faces headwinds from input cost escalation.

Already the construction costs have increased by about 15 per cent, thanks to the rise in in key raw materials such as cement, steel, copper, aluminium, and crude oil.

The policy rate hike has happened at a time when the developers were breaking their heads on how to ger around the increase in construction cost in a market that has few buyers after being devastated by the years-long pandemic.

“And now with the home loan rates are bound to head north closely tracking the trajectory of repo, we are caught in a double whammy situation,” said a leading developer based in Kochi while talking to businessbenchmark.news.

The MPC has not only increased the repo and reverse repo by 40 basis points to 4.40 per cent and 3.75 per cent respectively, it has taken a meaningful step towards absorbing liquidity from the system by raising the cash reserve ratio (CRR) by 50 basis points to 4.5 per cent of the net demand and time liabilities (NDTL), effective from the fortnight beginning May 21, 2022.

The withdrawal of liquidity through the increase in the CRR would be of the order of Rs87,000 crore, further tightening the credit market. The dilemma before the developers now is how they could pass on the steep rise in the construction cost at a time when their prospective customers are bound to be burdened with higher loan EMIs on count of the imminent interest hike.

Steel prices increased 30 per cent from March 2021 to March 2022; cement costs went up by 22 per cent year on year, whereas copper and aluminium were up by 40 per cent and 44 per cent respectively in the past one year. Over the last one year, developers’ average cost of construction has risen 10-12 per cent, owing to higher input costs.

Property prices to go up

Real estate prices are likely to go up as construction costs have increased by about 15 per cent owing to increase in key raw materials such as cement, steel, copper, aluminium, and crude oil.

The loans are increasingly getting linked to the repo rate set by the Reserve Bank of India (RBI) at regular intervals, as against MCLR and banks’ base rate, which used to be the benchmarks until October 2019.

Reversal of rate action

It may be recalled that in response to the pandemic, monetary policy had shifted gears to an ultra-accommodative mode, with a large reduction of 75 basis points in the policy repo rate on March 27, 2020 followed by another reduction of 40 basis points on May 22, 2020.

Accordingly, the decision of the MPC on May 4 to raise the policy repo rate by 40 bps to 4.40 per cent may be seen as a reversal of the rate action of May 22, 2020 in keeping with the announced stance of withdrawal of accommodation set out in April 2022.

“In the conduct of monetary policy, we have demonstrated our resolve not to be bound by any rulebook and our preparedness to decisively deploy the full range of tools – conventional and unconventional. By remaining accommodative, monetary policy continues to foster congenial financial conditions to support growth and mitigate the adverse effects of the geopolitical crisis,” the RBI statement said.

Globally, inflation is rising alarmingly and spreading fast. Geopolitical tensions are ratcheting up inflation to their highest levels in the last 3 to 4 decades in major economies while moderating external demand.

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