RBI's rate hike to push up costs: Realty, capital goods companies

Real estate and capital goods companies are worried that the Reserve Bank of India’s rate hike on Wednesday will hurt their recovery as home and vehicle loans become costlier.

“A hike was inevitable, but we are now entering the red zone. Any future hikes will reflect markedly on housing sales,” said Anuj Puri, chairman of real estate advisory firm Anarock.

The hike will depress consumer demand. “The RBI is tasked with controlling the spiralling inflation in the country but must simultaneously be careful to not  hurt demand recovery. This is a tightrope walk under the best of circumstances. Overall, high inflation with low GDP can be a cause for worry but as of now the Indian economy remains robust.

“The rate hike will push up home loan interest rates, which had already begun creeping upward after the surprise monetary policy announcement last month. Interest rates will remain lower than during the global financial crisis of 2008, when they went as high as 12 per cent and above. Nevertheless, the current hike will reflect in residential sales volumes in the months to come, more so in the affordable and mid-segments,” said Puri.

Ramani Sastri, chairman and managing director (MD) of real estate firm Sterling Developers, said interest rates impact the cost of doing business. The RBI’s move will hurt business sentiment when the economy is recovering from the coronavirus pandemic. "However there has been a fundamental change in buyers’ expectations and attitude towards homeownership and this will largely withstand marginal fluctuations in lending rates,” said Sastri.

Experts said banks raised the interest rate on home loans by 30-40 bps when the RBI last hiked the repo rate in May. They reckoned that with the repo rate cumulatively higher by 90 basis point, the interest rate for homebuyers will increase further. “Rising interest rate along with elevated property construction cost and product price pressures could adversely impact the real estate buyer’s sentiment,” said Shishir Baijal, chairman and MD of Knight Frank India, a real estate consultancy firm.

Sanjiv Bajaj, president of the Confederation of Indian Industry (CII), said that the RBI has to temper inflation as it tries to support growth. “RBI’s concern on containing inflation is appreciated, given that it is impinging on the margins of businesses and also hurting consumer demand. Going forward, inflation is likely to moderate owing to the fiscal interventions of the government and favourable monsoon which would soften food prices," he said.

The capital goods industry too was worried about rising rates.

Vimal Kejriwal, MD and chief executive officer of KEC International, said the repo rate hike will increase interest costs. “There will also be an impact on capex plans because projects costs will go up, which will hit internal rate of return (IRR). Having said that, the repo rate hike has been done to curb inflation. On the positive side, therefore, I see commodity prices cooling off, which is good from a margin perspective,” he said.

“The capital cost of projects has substantially gone up, anywhere between 25 to 50 per cent for capital goods, due to commodity inflation. And with the RBI hiking interest rates, I see companies reconsidering their capex plans for now,” said M S Unnikrishnan, a former MD of Thermax.

Rajiv Agarwal, operating partner (infrastructure) at Essar and MD of Essar Ports, said the RBI’s change in stance from accommodative to withdrawal will ensure inflation remains within targets. “However, it could hamper some business opportunities. The economic growth of our country requires support from RBI and the strengthening of the banking system will further boost economic recovery. RBI’s projections of GDP growth rate of 7.2 per cent and inflation of 6.7 per cent for FY23 remain realistic,” he said.