Fed Rate Hike Has Put RBI In A Tight Spot

When the Reserve Bank of India (RBI) decided to keep the key policy rates unchanged in its monetary policy review on December 7, it cited a likely rate hike by the US Federal Reserve (Fed) in its coming meet. Developers, who were left wondering about the future course of the sector after the Central government launched its demonetisation drive a month ago, were flabbergasted.

"When things were not looking up, it (RBI's decision) is one more thing that is not going to help," Hiranandani Communities Managing Director Niranjan Hiranandani had told Business Standard after the announcement.

At home, the pressure on the central bank to reduce rates to make homes cheaper had been building after demonetisation. However, evaluating the matters of international significance was far more pressing.

"International financial markets were strongly impacted by the result of the US presidential election, and incoming data that raised the probability of the Federal Reserve tightening monetary policy. As bouts of volatility fuelled a risk-off surge into US equities and out of fixed income markets, a risk-on stampede pulled out capital flows from EMEs, plunging their currencies and equity markets to recent lows, even as bond yields hardened in tandem with US yields. The surge of the US dollar from late October intensified after the election results and triggered sizable depreciations in currencies around the world," the RBI said in its Fifth Bi-monthly monetary policy statement.

Putting conjectures to rest, the Fed announced on Wednesday hiked its benchmark lending rates by 25 basis points -- between 0.50 per cent and 0.75 cent---  with all members of the Federal Open Market Committee voting in favour of the raise. The Fed move will now force India's central bank to hold rates. In fact, the tightening of money supply across the world may further force the RBI to hike rates in future. This would result in a rise in the cost of borrowing for home buyers as well as real estate developers.

Also Read: What Happens To Indian Real Estate When US Fed's Interest Rates Rise?

At a time when developers are busy inventing ways to sell their old inventory while home buyers remain aloof, a reduction in interest rates by the RBI was their only hope. It was expected cheaper home loans would bring buyers back to the market.

And, then there are other pain points, too.

The US currency is seen getting stronger against Indian rupee in the wake of the Fed move. This would mean developers debt that they own in the US currency will now grow bigger. This will also impact new launches and spending on residential property adversely.

Also Read: Fed Rate Hike Just Made Indian Real Estate More Attractive For NRIs

Developers and home buyers will be listening with keen interest when the RBI announces policy rates in its meeting scheduled on February 7.