Update: Reserve Bank unlikely to cut key rate in February

Recently released SBI Research Report stated that Reserve Bank is unlikely to cut repo rate in the February review meeting due to the prevailing global uncertainties and it's stance may continue to be accommodative next year as inflation is expected to remain benign. 

"We expect RBI may not oblige with a rate cut in February as global uncertainties may again play spoilsport, according to Ecowrap, an SBI research report.

It said inflation trajectory is expected to remain significantly benign. The December inflation numbers may witness a reading closer to 3.2-3.3 percent.

"Though inflation may increase in March, it may still be closer to the lower band of 4-4.5 per cent. Hence, the scope for accommodative monetary cycle will continue even in the financial year 2017-2018," the report said.

Real estate developers can look forward to more than improved sentiment and better sales. Lower interest rates will also help developers of real estate in India who have seen rising debt in the past few years.

In the past two years, real estate developers have been trying to trim their loan books. According to latest number, the largest ten real estate firms (by market capitalisation) have a debt of Rs 22,868 crore. This is among the listed real estate companies.

Banks have reduced interest rates. But, globally, banks charge real estate developers higher interest rates. In some cases, real estate developers pay higher interest rates than their peers in telecom and infrastructure.

For real estate developers, lower interest rates would mean savings of tens of crores of Rupees per quarter. This is a relief for real estate companies that have been witnessing slow sales. Many real estate companies like Prestige, Indiabulls, Godrej and Sobha have debt in the range of Rs 2,000 crore to Rs 4,000 crore. The debt of DLF India stands at Rs 8,419 crore. 

Traditionally, real estate companies use deposits from early buyers to take a project off the ground. Yet, developers need bank loans to buy land, acquire assets and to plug gaps in deposit and construction costs. The need for short-term loans rises as the cost of construction rises, especially to developers who have a difficult time selling under-construction projects in India. The most comfortable developers are those who sell at least 60 per cent of the project during construction releasing funds in many phases. After the slowdown in sales for the past two years, things have been less than ideal for the sector, with developers borrowing more, inventory piling up in both under construction and completed projects.

“We believe that the credit metrics of real estate companies will continue to deteriorate in the year, as demand will remain subdued amid high property prices, even while inventory is being built-up using bank funding,” said a 2015 report by India Ratings, which maintained a negative to stable outlook on the real estate sector for 2015-16. The rating, however, mentioned that any change in the factors like rise in demand, leading to strong free cash flow and a reduction in debt levels could change the outlook of the sector to stable.

The repo rate cut the RBI announced will lower interest rates to a six-year low at 6.25 per cent. This may change the fortunes of real estate companies in India and is likely to save it from real estate bubbles that countries such as China witnessed. Chinese real estate companies have drastically cut prices. In some cases, luxury condo projects in Shanghai have cut prices by one-third, and have used asset monetisation such as land sales to stay solvent. If real estate developers are able to raise sales in the current low-rate regime and get banks to soften their stance with accommodative interest rates, the sector is in for a revival.