Real Estate Intelligence Service, Tuesday, October 27, 2009

Growth forecast falls to 6% in RBI survey

Growth forecast falls to 6% in RBI survey
Business Standard, October 27, 2009, Page 1

BS Reporter / Mumbai

Professional forecasters have added to Reserve Bank of India (RBI) Governor Duvvurri Subbarao’s dilemma on timing the exit from an accommodative monetary policy stance.

A median forecast released by RBI in the pre-policy ‘Macroeconomic and Monetary Developments: Second Quarter Review 2009-10’ this evening lowered the economic growth projection to 6 per cent from the 6.5 per cent projected three months ago. At the same time, the forecast on inflation based on the wholesale price index (WPI) was raised to 3 per cent, as against 1.6 per cent estimated earlier.

Last week, the Prime Minister’s Economic Advisory Council headed by C Rangarajan had said the economy could grow between 6.25 per cent and 6.75 per cent, as against the 7-7.5 per cent projected in January.

In fact, it was the only agency to have lowered the forecast with the other projections hovering between 5.1 per cent and 7.2 per cent.

During the next financial year, the forecasters have projected a gross domestic product growth of 7.7 per cent, as against 7.5 per cent estimated in the previous survey. Inflation is expected to be 5.8 per cent.

While the median for the forecasters’ survey was closer to the estimates released by RBI at the time of the first quarter review in July, the central bank appeared more worried about inflation than growth.

Apart from the fact that the report chose to devote most of its analysis on the growth and inflation outlook to price rise, RBI acknowledged that weak recovery and elevated levels of consumer price index-based inflation had made the policy challenges difficult. “Among the alternative plausible sources of inflation that could determine the near-term inflation outlook, factors which support possible firming up of headline inflation clearly overshadow the factors which may help in containing inflationary pressures,” it added.

Inflation based on the wholesale price index was estimated at 1.2 per cent on October 10, 2009 and RBI said that inflationary pressures had started to emerge, with WPI showing a 5.9 per cent increase over the March 2009 level and CPI inflation staying stubbornly in double digits. “From the stand point of monetary policy, anchoring inflation expectations in the face of sustained high inflation in essential commodities will be a key challenge,” it added.

On economic growth, however, RBI appeared more optimistic and said that the survey had forecast lower growth due to the impact of the deficient monsoon on farm sector output. According to the professional forecasters’ survey, agricultural production was projected to dip by 1.4 per cent during the current financial year.

But it listed eight factors including the impact of the stimulus packages, and improved showing from the industrial and infrastructure sectors to draw comfort. The other positives listed included revival in capital flows and stock markets, improvement in overall global economic and financial conditions, improvement in lead indicators such as freight movement and data coming from sectors such as cement, steel and automobiles.

Besides, it pointed out that business confidence had improved. RBI’s Industrial Outlook Survey, conducted in July-August, also showed further improvement in the sentiments of the manufacturing sector and indicated that the industrial sector could gain further growth momentum.

The survey revealed that the demand conditions had improved, better employment prospects across sectors (with textiles being the sole exception), return of pricing power that could give rise to higher selling prices and better availability of finance. It also indicated that working capital requirement would grow in the third quarter and help reverse the decelerating trend. The only negative from the survey was higher input costs.

While inflation was the biggest worry for RBI, it also listed seven risks to growth staring with a deceleration in private consumption and investment demand. It said a contraction in credit card and consumer durables-related credit pointed to a deceleration in private consumption. In any case, non-good credit growth has decelerated in recent months to a new 12-year low in the year to October 9.

RBI said deficient rains in some parts of the country and floods in some other areas could affect rural demand. The other bad news was depressed external demand for services and contraction in non-oil imports and weak capital goods production.

“Managing this tradeoff between supporting growth and reining in inflation expectations poses a complex policy challenge,” RBI said.

RBI survey lowers growth outlook to 6%

RBI survey lowers growth outlook to 6%
The Hindu Business Line, October 27, 2009, Page 7

Our Bureau, Mumbai

The overall growth outlook has been impacted by the decline in agriculture output on account of the deficient monsoon, the Reserve Bank of India said in the second quarter review of Macroeconomic and Monetary Developments, released on Monday.

The RBI’s survey of professional forecasters has suggested a downward revision in the growth outlook for 2009-10 from 6.5 to 6 per cent.

Contrary to this, the RBI’s industrial outlook survey had indicated an expansion in the economy and projections of other domestic and international agencies had also pointed to an improvement in India’s growth outlook.

In the ninth round of survey of professional forecasters’ conducted by RBI in September 2009, the projection for sectoral growth rate for agriculture was revised downwards from 2.5 per cent to -1.4 per cent, whereas for industry the projection was revised upwards from 4.8 per cent to 6.3 per cent. For services, the forecasters suggest modest downward revision from 8.3 per cent to 8.1 per cent.

According to the survey, some factors that indicate a faster and sustained recovery in growth include visible signs of industrial recovery such as 5.8 per cent growth in IIP during April-August 2008 as against 3.3 per cent in same period last year, the infrastructure sector showing higher growth of 4.8 per cent in April-August 2009, revival in capital flows in the first half of 2009-10 after two consecutive quarters of net outflows in the second half of 2008-09 and significant recovery in the stock market.

Among the downside risks, listed by the survey, are deceleration in growth of private consumption and investment demand, deficient monsoon and drought like conditions in several parts of the country, deceleration in non-food credit growth, negative growth in non-oil imports and weak growth in capital good productions.

RBI loath to spoil feel-good party, but tense over prices

RBI loath to spoil feel-good party, but tense over prices
The Economic Times, October 27, 2009, Page 9

ET Bureau, MUMBAI

The Reserve Bank of India has acknowledged the resurgence of the feel good factor in the Indian economy but has said that growth and
inflation continue to be a concern.

Maintaining a hawkish stance on inflation, the central bank has highlighted its concern over slowdown in credit offtake and surplus liquidity in the system, giving no clear indication on its rate stance. In its report on Macro and Monetary Developments in Q2 of 2009-10, the Reserve Bank has noted that `The combination of a weak recovery and elevated CPI (consumer price index) inflation has already magnified the complexity of policy challenges, notwithstanding the subdued nature of headline WPI inflation so far.’

`While premature reversal of the monetary policy stance entails the risk of stifling recovery, persistence of accommodative stance could adversely impact inflation expectations.’

However, the results of its survey based on “assessment for July- September 2009” and “expectations for October-December 2009” point to a strong momentum in industrial recovery. Both the indices remained above 100 for the second consecutive quarter (100 is the threshold that separates contraction from expansion). According to the central bank’s analysis, this suggests that the industrial recovery already seen up to August 2009 in terms of trends in IIP growth could gain further momentum.

According to the survey findings, the outlook for employment is also improving and firms are expected to increase their workforce on the back of expected increase in demand.

Among the positive pointers to the economic recovery include improved financial conditions as reflected in return of capital flows, significant recovery in the stock markets, and better transmission from low policy rates to declining lending rates. The RBI has also said that there should not be any concerns about private credit getting crowded out since over 80.4% of the government borrowing programme has been completed so far as there is adequate liquidity in the system.

But it is concerned about the deceleration in private consumption and investment demand that it says needs to be reversed from the low levels seen in the first quarter of 2009-10 for ensuring a sustainable recovery.

No change in key rates expected, CRR may be hiked: Banks

No change in key rates expected, CRR may be hiked: Banks
Business Standard, October 27, 2009, Section II, Page 2

BS Reporter / New Delhi

The Reserve Bank of India (RBI) may leave the policy rates untouched when it reviews the monetary policy on Tuesday, HSBC India CEO Naina Lal Kidwai said on Monday. TY Prabhu, chairman of the Oriental Bank of Commerce (OBC), seconded her views. The bankers, however, agreed there might be a small increase in the cash reserve ratio (CRR) as the system was flushed with funds.

"The RBI governor is clearly concerned about inflation, while he fully understands that having expansionist monetary policy has been important to provide the stimulus we need. I expect the rates to remain flat. A little bit change in CRR is fine," she told reporters on the sidelines of an industry event.

Prabhu declined to comment on the possible action by RBI, but agreed there was no immediate pressure (on the RBI to increase rates) due to adequate liquidity in the system. “We expect the present policy stance to continue. Interest rates would remain at the present level for the next three to six months.”

OBC executive director S C Sinha said a 25 basis points increase could be expected in CRR but overall interest rates would remain soft because of comfortable liquidity situation.

Kidwai added that the monetary policy was not just meant for tinkering with rates and the central bank could revise rates even outside the credit policy if needed.

She said the economy had started recovering and some action could be expected around December.

HSBC is expecting India to grow at 6.5 per cent this year and 8 per cent in 2010-11.

Asked whether RBI was expected to revise its credit growth target of 20 per cent for 2009-10, she said the central bank might stick to the target while asking banks to lend more.

“It may push banks into lending. This is the time to loosen purse strings.”

Rates will stay, but CRR hike likely

Rates will stay, but CRR hike likely
The Hindu Business Line, October 27, 2009, Page 7

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The Government is probably mindful of the RBI’s concerns but wants to be sure the recovery has taken hold and will endure.
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S. Balakrishnan

“RBI Governor meets Finance Minister ahead of Monetary Review,” screams newspaper headlines.

It’s certain the Governor made a case for tightening of policy. Going, however, by the public pronouncements of those in Delhi, it’s equally certain Mr Pranab Mukherjee demurred.

Who’s right?

The economy took a steep dive in Q42008 and Q1 2009. The RBI didn’t dither. It acted with commendable initiative and speed to slash banks’ reserve ratios and interest rates. The former was especially important in providing sufficient liquidity to the economy. Combined with these was the continuation and increase in Government spending without worrying about its effect on the budget deficit. To everyone’s relief, the economy picked up smartly and quickly.

Apart from the National Rural Employment Guarantee Scheme injecting some income into the rural unemployed, the Pay Commission’s substantial enhancement of the salaries of Government employees was India’s version of a fiscal stimulus. Some State Governments followed suit, with the result that consumer spending and, more critically, business and consumer confidence got a boost. The RBI has been entirely accommodative of Government’s needs during this period. The latest GDP and industrial production data confirm the near “normalisation” of the economy.

Capex is back

Stock prices were driven unreasonably low – the Sensex went below 8,000 – and have since recovered most of the fall or gone over in many cases. Real estate prices are climbing – they never actually fell in the prime areas of the metros. Capex, at least in infrastructure, is back.

The major concern is the trade deficit, thanks to rising international oil prices and flagging traditional exports such as textiles. But remittances and non-resident Indians’ deposits are buoyant thanks to the crisis of confidence in the major financial institutions of the world.

Overall, the RBI Governor seems to be playing from a strong hand if indeed he prefers to remove some of the monetary relaxation.

The Government is probably mindful of the RBI’s concerns but wants to be sure the recovery has taken hold and will endure. The wild card is not so much the domestic situation as a slip back of the US economy and markets. It could have a significant psychological and then real effect.

Therefore, there’s a high likelihood of the powers-that-be finding a middling sort of solution.

Liquidity

That would involve leaving policy rates – the repo and reverse repo – where they are and focusing on liquidity. The RBI’s discomfort is plainly with the excess reserves of over Rs 1,00,000 crore held by banks, with the potential to exit into the economy.

The modus vivendi might be to raise the Cash Reserve Ratio by 25-50 basis points. It’s tantamount to making bank funds more expensive without actually raising rates.

That could be the face-saving way out for the Government and the RBI.

High inflation rates a cause for concern

High inflation rates a cause for concern
Business Standard, October 27, 2009, Section II, Page 3

BS Reporter / Mumbai

Although year-on-year inflation is still only 1.2 per cent, strong upward trends seen in the Wholesale Price Index (WPI) inflation and the persistence of high Consumer Price Index (CPI) inflation are a cause of concern, the Reserve Bank of India (RBI) said in its pre-monetary policy review today.

The WPI inflation has risen by 5.9 per cent over its end-March 2009 level, while CPI inflation has been in double-digits for the past few months.

The recent increase in the WPI was largely because of the upward revision of prices of petrol and diesel, increase in prices of freely priced fuel products and higher prices of sugar, vegetables and medicines.

According to the Reserve Bank of India (RBI), CPI inflation persisting at high levels could lead to inflation, as wages and prices would come under increasing pressure of upward revision as pricing power and wage bargaining in the economy gradually returned.

Other factors that could contribute to inflationary pressures are high inflation in food and essential commodities, limited import options for specific commodities and the risk of a further increase in minimum support prices (MSPs) of agricultural crops.

“Given the supply-side sources of emerging inflationary pressures, the policy focus needs to be directed at improving both supply conditions and supply chain for more efficient distribution,” RBI said.

On the other hand, the sources of comfort on the inflation front could be a persistence of negative output gap, weak aggregate demand as well as stabilisation of international oil prices over the last few months.

The recent deceleration in broad money growth despite the accommodative monetary policies of the central bank was a positive sign, RBI said.

Effective use of the high stock of foodgrains with special focus on improved distribution, a better harvest during the rabi season and selective import of certain commodities would further contain inflationary pressures, according to RBI.

Realty, banking stocks take hit

Realty, banking stocks take hit
The Financial Express, October 27, 2009, Page 1

A day ahead of RBI's review, shares of rate-sensitive sectors witnessed heavy late selling on domestic equity bourses on Monday. The BSE realty index was the biggest loser, falling4.59 % , with DLF Ltd ending the day at Rs 454.70, shedding 5.41 %. The BSE Bankex lost 1.64%, with India's largest public sector lender, SBI, off by 2.05% to end at Rs 2,353.85. Private sector lenders ICICI Bank and HDFO Bank lost

1.49% and 0.08%, respectively. The 3()..share Sensex of the BSE closed the day at 16,740.50 points, down 70.31, or 0.42%, while the broader 50-share Nifty of the NSE dropped 26.15 points, or 0.52%, toendat4970.90. "Even if rates are not tinkered with, there is an overhang about RBI coming out with some statement reversing its accommodative monetary policy going forward, "said Elara Capital analyst Arup Misra.

Realtors in South defy trend, say no to price hike

Realtors in South defy trend, say no to price hike
The Financial Express, October 27, 2009, Page 12

Sajan C Kumar, Chennai

Bucking the national trend, realtors in south India appear to be in no mood to raise prices. A cross section of leading construction firms which FE contacted say after the lull, demand has just started picking up and they want to cash in by pushing up the volume. “We cannot afford to drive away customers when the demand is there,” said T Chitty Babu, chairman and CEO, Akshaya Pvt Ltd, one of the key realty players in Chennai. Sentiments across the realty market have seen a marked improvement, with some favourable steps taken by the Tamil Nadu government. A substantial number of enquiries are coming in and, coupled with the low interest rates, the enquiries are sure to be converted into bookings, he said.

Many of the realtors in the South say their first priority will be to clear out the inventory at the prevailing price. The builders in Mumbai and Delhi have hiked prices of residential apartments by 10% to 15% during the last three months.

Prakash Challa, president, Confederation of Real Estate Developers Association of India, said though there has been no increase in prices like Delhi and Mumbai, some developers have cut down on the discounts they were offering in the lull period. Sudharshan KS, CEO, Ozonegroup, said, “At a time when the market has taken a positive turn with enough enquiries pouring in we will be focusing on pushing our projects with added vigour.”

Ravindra Sannareddy, managing director, Sri City said the realty sector is thriving with activities. “Even when the country was going through the impact of the meltdown, the commercial realty segment was very active. The only slowdown was in the residential segment, which obviously saw fewer transactions, compared to the boom period

KA Mohamed Saleem, managing director, Asset Homes said, “Slowdown or no slowdown Kerala has always been a stable market for realtors with no significant escalation in prices. Though there has been a pause in construction during the height of the meltdown, the prices have not come down drastically. Therefore, we see no scope for a price hike when the realty market is on a revival path.”

Housing min tweaks Parekh panel report

Housing min tweaks Parekh panel report
The Financial Express, October 27, 2009, Page 23

Kakoly Chatterjee, New Delhi

The housing ministry is fine-tuning the recommendations of the Deepak Parekh committee on affordable housing. The ministry does not want the monthly installments of both the categories, the economically weaker sections (EWS) and the lower middle income group (LMIG), to exceed more than 25-30% of the monthly income of the house owners.

The equated monthly installments (EMI), in absolute terms, should be in the range of Rs 500 to Rs 750. The ministry has suggested that the duration of payments should be around 15 years.

If an owner is paying interest of Rs 750 for Rs 100,000 every month, the interest rate works out to be 0.75%. Banks are reluctant to give loans at such low interest rates mainly because people from economically weaker sections do not have any regular jobs and therefore their payments on loans is uncertain.

With banks and home finance companies reluctant to lend to this category owing to the high risk of defaults, the ministry is looking at setting up a housing micro finance company. For this, the ministry has set up a committee to find out if there should be a micro finance company with focus on housing finance. The ministry is also considering whether the housing micro finance company should take household savings as deposits. The ministry is in consultation with banks and financial institutions as to how funds can be availed at a cheaper cost. The Deepak Parekh committee report on affordable housing had suggested that EMIs for EWS and LIG housing should not exceed 30% of gross monthly income, while for MIG, it should not be more than 40% of the gross monthly income. People earning up to Rs 3,300 a month come under the EWS category, while people earning up to Rs 7,300 fall under the MIG category.

I-T Department serves fresh notice on DLF

I-T Department serves fresh notice on DLF
Business Standard, October 27, 2009, Page 3

BS Reporter / New Delhi

The Income Tax (I-T) Department has issued a fresh notice to realty major DLF even as it’s appeal against an additional tax liability imposed on it by the I-T Department is being heard.

The demand for additional tax payment first came after the Institute of Chartered Accountants of India (ICAI), which sets auditing standards, revised its accounting norms during 2005-06. The change had required real estate developers and construction companies to change from the conventional way of accounting to the new method and incorporate the changes in their tax liabilities.

Pursuant to the change, a special audit conducted by the I-T Department resulted in a demand for additional tax payment from DLF based on its account books for the financial year 2005-06. DLF appealed against the I-T Department’s move and informed the stock exchanges that any adverse ruling could result in an additional tax liability of Rs 200-300 crore.

DLF has termed the fresh notice from the I-T Department as a “routine follow-up”.

“This is a routine notice as a follow-up to last year. The due legal process is on and our appeal on last year’s assessment is sub judice in the I-T Department. DLF is sure of its facts and figures, which will be duly considered in the appeal,” a company spokesperson said.

Tax Department issues notice to DLF for assessment year 2007-08

Tax Department issues notice to DLF for assessment year 2007-08
The Hindu Business Line, October 27, 2009, Page 2

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“We are sure of the fact and figures which will be considered in the appeal”, said Mr Rajiv Talwar.
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Our Bureau, New Delhi

The Income-Tax Department has issued a notice to real estate major DLF Ltd for a special audit for the assessment year 2007-08.

Earlier this year, in relation to a tax matter pertaining to financial year 2005-06, the Tax Department had passed an order, adding close to Rs 1,200 crore as DLF’s taxable income for FY06.

The company had challenged the order with the appellate authorities and the matter is currently under appeal.

When contacted, the DLF group Executive Director, Mr Rajiv Talwar, confirmed that the company had received the notice.

“We are sure of the fact and figures which will be considered in the appeal,” he said.

Company sources said that the latest notice was in line with the previous tax case. “If a view is taken for a particular year, it may be incumbent on the assessing officer to take that view for the next year,” sources said.

In May the company, in a disclosure to the BSE, had referred to the tax case for fiscal 2005-06 and stated that it had got an expert opinion on the enhanced taxable income and was confident that the addition would not be sustained by the appellate authorities.

“In an unlikely event, if the said order is not reversed by the appellate authorities then it can result in a contingent liability of about Rs 300-400 crore,” the company had said, at that time.

The addition to income was the fallout of a special audit report of the Income-Tax Department. The Report of the Special Auditor recommended that the Tax Department re-assess about Rs 1,200 crore as additional income. On May 6, the Assessing Officer, following audit and assessment proceedings, issued an order adding most of the amount suggested in the Special Audit Report.

The year 2005-06 was the first year in which revised accounting norms prescribed by the ICAI (Institute of Chartered Accountants of India) became applicable for construction and real-estate development companies.

These norms allowed real-estate companies to use the ‘percentage of completion method’ (PoCM) to recognise revenues and profits.

DLF started using the PoCM from FY 2005-06, prior to which all accounts were prepared in accordance with the conveyancing method. DLF went public in mid-2007.

Under the PoCM method, revenues are recognised based on the actual proportion of completion of a project, while earlier the builders would recognise income and profits only after a project was completed.