The mid-month decision of the US Federal Reserve to raise benchmark interest rate by half a percentage point evoked much interest in India because of the signalling effect it is expected to have on the Reserve Bank of India (RBI) and central banks of other world economies.
In its continued battle against inflation, the Fed increased the benchmark interest rate to the highest level in 15 years. The Federal Open Market Committee voted to boost the overnight borrowing rate, taking it to a targeted range between 4.25 per cent and 4.5 per cent. Along with, it gave the indication to keep the rates higher through 2023, with no reductions until 2024.
The new level marks the highest the Fed funds rate has been since December 2007, just ahead of the global financial crisis. Though India, the fastest-growing economy in the world post-pandemic has not have much to fear about the aftereffects of the global slowdown that may impact various sectors, including real estate.
The sector, which has been buoyant since the Covid-19 pandemic, is most likely to continue with its growth momentum in the first quarter of 2023, say a majority of experts. Their optimism is based on the fact that so far, the impact of the rate hikes has been minimal on the home-buying sentiment.
The latest hike, announced by the RBI in December, was the fifth in seven months and it is set to increase the cost of home ownership further. Once that happens, it may impact the overall sentiment; and that is a cause of worry for the stakeholders of the real estate sector.
Looking at the Fed rate hike in this backdrop, their fears seem valid to an extent, but that is not the dominant sentiment in the industry. There are a good number of realty players and domain experts who discount such fears. The Fed decision, they say, is in response to an economy that may witness the worst downturn since the Great Depression. The situation in India is quite different, they argue.
Mr. Ashish Bhutani, CEO, Bhutani Group said, “The rate hike by the US Fed will hardly have any major impact on the Indian economy which has been arguably robust and far better than its peers. Well-poised to become the world’s third-largest economies in the world by 2027, the Indian economy is already resilient with a strong manufacturing push. Hence, there may be temporary fluctuation in the market sentiments, but that’s not going to impact the economy in the long run.”
Meanwhile, “After the US Fed has raised its policy rates the Indian Rupee which was already falling has further slipped to a record low against the US Dollar. Such a scenario has reduced the appeal of domestic assets back in India and made the Dubai real estate market more attractive for the Indian investors keen to either live, work or trade in the world’s safest city,” said Mr. Rizwan Sajan, Founder and Chairman, Danube Group, adding that already the growing trend of existing residents investing in property and the golden visa benefits have lifted the investor's sentiments several notches higher in UAE.
Undoubtedly, when the world economy increases interest rates too quickly, the economic growth of the developing nations may get slow, or in the long run, it can give way to recession. However, in the Indian context, the scenario is different.
Mr. Ajay Chaudhary, CMD, Ace Group opined, “As the fundamentals of the Indian economy are strong and its inherent capability has already made it achieve commendable growth rate, the aggressive stance by the US Fed is unlikely to dampen the spirit. Above all, the Indian central bank has already been taking appropriate measures and so, there is no need to be worried about this.”
In terms of the Indian real estate sector, in particular, the only concern is the burden of increased home loan rates, due to the continuous hike in repo rate by the RBI. It will certainly impact property sales. However, the emerging scenario has another positive side that one must look at. Many real estate developers have not increased property rates in the last couple of years. Still, the Fed move is an alarm bell. Even though there are no short-term concerns, the global slowdown due to this may hurt the economy beginning next fiscal. Hence it’s time to be cautious and take appropriate steps.