Editor's Note: Hope Floats For Real Estate As Indian Economy Grows
Even though the markets crashed the previous week, the Indian economy is in a position to emerge unscathed. The Reserve Bank Of India (RBI) Governor Raghuram Rajan, an internationally respected economist who does not mince his words, has as much as said so. There is every grain of reasonable logic in Rajan's statement, who had earlier said that he did not want to comment on India's high GDP growth rate till he understood them well. If the Indian economy remains robust, real estate markets would grow and flourish too.
Rajan seems to have facts on his side. The International Monetary Fund (IMF) expects India to grow at 7.5 per cent in the current financial year, maintaining its status as the fastest growing major economy. India's foreign exchange reserves are high. The fiscal deficit and current account deficit are declining.
The Consumer Price Index* based inflation was merely 3.78 per cent in July 2015. Since Rajan assumed power, inflation has fallen to historically low levels by Indian standards. Home buyers benefited from low inflation levels because the RBI cut the repo rate from 8 per cent to 7.25 per cent in 2015. Commercial banks followed suit, slashing home loan interest rates. Even though home loan interest rates are still high, it is possible that this will change in the next few years. Rajan said that the RBI may cut the repo rate further, if inflation declines in the next few months. As commodity prices are low, this is likely.
When interest rates fall, the unsold inventory in the major Indian cities has a strong chance to get absorbed, as home affordability will rise. Moreover, India has been rapidly urbanising over the past one decade. When more Indians move to urban areas, the absorption of unsold inventory is likely to happen at a faster rate than we expect. If the Indian economy grows at a much faster rate in the next few years -- as Rajan and Finance Minister Arun Jaitley have been assuring us, sale of residential units in Indian cities will rise too.
A few years ago, such a scenario was inconceivable as the GDP growth rate slumped during the UPA government's rule. Inflation was, at times, in double digits. India's fiscal deficit and current account deficit were high too.
Today, occasional slumps notwithstanding, we are living in the best of times, even as the worst in real estate is yet to pass. Let us hope that good times in the economy augur well for the real estate industry in the months ahead.
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*The Consumer Price Index (CPI) measures the changes in the price level of a market basket of consumer goods and services that households purchase.