Real Estate Intelligence Service, Wednesday, October 28, 2009

Curtains for easy monetary policy

Curtains for easy monetary policy
The Economic Times, October 28, 2009, Page 1

No Change In Key Rates, But SLR Increased By 1%

Our Bureau MUMBAI

RBI governor Duvvuri Subbarao on Tuesday ended his soft monetary policyaimed at easing the credit crisis last yearby withdrawing liquidity-boosting measures, becoming the third central banker in the world to do so after Israel and Australia. An increase in lending rates is now imminent next quarter if consumer and asset prices remain high. Benchmark rates were, however, kept unchanged.

Mr Subbarao withdrew a special facility that made funds available from banks to mutual funds and finance companies; made loans to commercial real estate more expensive; forced banks to invest more in government bonds; and asked lenders to set aside more funds for bad loans. The special facility was introduced last year to boost liquidity to financial sector firms after the credit markets froze.

RBI maintained the repurchase rate, or repo ratethe rate at which it provides funds to banksat 4.75%; reverse repo ratethe rate at which it accepts deposits from banksat 3.25%; and the cash reserve ratiothe slice of deposits banks have to mandatorily park with the central bankat 5%.

But the central bank surprised the market in its choice of instruments to announce the exit of an easy money policy. The statutory liquidity ratio (SLR), which prescribes the percentage of deposits that banks are required to invest in government debt, has been raised from 24% to 25%, which Mr Subbarao said was a reversal of an exceptional measure. Last year, at the height of the global credit crisis, RBI had lowered the SLR to ease credit flow to industry.

The apex bank also raised its forecast for inflation as measured by the Wholesale Price Index to 6.5% by March 2010, from 5% earlier, as food prices continue to rise on short supply due to the worst monsoon rains in more than a quarter of a century.

We could see stronger action in the coming quarters, StanChart India CEO Neeraj Swaroop said. RBI will wait for stronger data before taking more aggressive measures, he said.
JPMorgan India chief economist Jahangir Aziz also foresees a sharp rise in lending rates if RBI were to hike interest rates later. The Indian Banks Association (IBA)the lobbying arm of commercial bankssaid it expects interest rates to remain stable for a while.

Despite fiscal policy managers saying they want to ensure that there is a solid rebound in growth before interest rates are hiked, the Centre and Reserve Bank governor have chosen a policy that leads rather than follows the market.

HOLDING TIGHT

A non-event

Not really. Without hiking interest rates, the Guv has done enough to hint that rates will harden in a few months. Lending rules have been tightened and a few fire-fighting measures taken during the October '08 crisis have been withdrawn

Whom will it hurt?

Builders and banks. Loans to builders, particularly those setting up office buildings, malls and multiplexes, will become more expensive. Banks will have to provide more, or set aside a bigger slice of their earnings, for such loans, even if the borrower does not default

So, what happens to loans that have turned sticky

Banks will have to step up their provisioning for bad loans. If a loan outstanding is Rs100 crore, a bank will have to provide a minimum 70% (or, Rs 70 cr). This will impact profits of many big banks. Bankers feel RBI should take a relook at this

Has RBI made things difficult for the consumer

No. Banks are not expected to hike interest rates on home, auto and personal loans immediately. But they may in Jan. That's when RBI may hike CRRthe slice of customer deposit that banks set aside as cash with RBIto reduce surplus money with banks

Then, why's Dalal Street nervous

The market was set for a correction and took the hawkish policy as a trigger. Realty stocks plunged & biggies like SBI and ICICI slipped. Besides higher provisioning , RBI said it will not relax the mark-to-market accounting norm on g-sec holdings of banks. So, banks will have to take m-t-m hits as interest rates rise

Is RBI trying to discipline banks

In a way. Besides new loan rules, it will also outline broad rules on the salaries banks pay to their CEOs and senior managers. While RBI today has the last word on CEO pay, there are no guidelines like the ones applicable for bonus payments

H I G H LI G HTS

Keeps benchmark interest rates unchanged

Hikes SLR by 100 bps to 25%

Retains GDP forecast for FY10 at 6%

Says industrial output may revive in the near term

Cuts money supply growth target a hint that CRR may rise

Funds just got costlier for builders

Funds just got costlier for builders
The Economic Times, October 28, 2009, Page 13

RBI move to hike provisioning for realty loans aims to avoid creation of another bubble

Pallavi Mulay & Supriya Verma Mishra ET INTELLIGENCE GROUP

THE RBIs credit policy announced on Tuesday appears intended to rein an incipient bubble in the real estate sector. The provisioning requirement for loans to commercial real estate has been increased from 0.40% to 1%, implying costlier bank loans for the sector. As most of the realty companies rely on bank funding, especially in times of financial crisis, this move could have an impact on the sector.

As banks often keep a cushion for any regulatory changes in provisioning, this measure is more for bringing moderation in the realty sector. Since necessary reduction in prices has still not taken place and there is fair amount of money available for the sector, this step is to avoid creation of another asset bubble , says M Narendra, executive director of Bank of India.

Not unexpectedly, industry officials differ. According to Rajeev Talwar, executive director of DLF, Stability in major parameters is a good sign, but increasing the risk weightage for commercial real estate is a negative signal, which is perhaps not required so early in the economic revival process. It remains to be seen whether this latest measure has the desired impact of curbing any further rise in property prices. Since there is a huge latent demand to be fulfilled, some builders are confident of sales being unaffected by any increase in prices. Indeed, in some cities property prices have gone up by 5-15 % in past two-three months.

But other industry official doubt whether any price increase can be passed on. Property prices are a function of demand and supply and it will not be easy for developers to pass this extra cost to the buyers as many places, especially in central Mumbai and parts of Delhi, have already seen a significant price run-up , says Keki Mistry, vice-chairman and managing director of HDFC.

Sudhir Reddy, managing director of IVR Prime, a southbased builder, says: It is easier said than done that companies will pass on the incremental cost of funds to homebuyers. One must not forget that increase in market price will result in additional construction costs for builders. This will not be possible when places like Hyderabad, Chennai and Pune are still facing a glut in demand. Sunil Malhotra, CFO of Delhi-based Omaxe, says: As demand is still price-sensitive , it will not be easy for developers to pass that extra cost to consumers.

In short, the current measures may not have significant impact on the financials of real estate companies or prices. Tuesdays policy pronouncements shows that the apex bank has become vigilant . Hari Pandey, VP-finance , HDIL, says the increased provisioning will not cost more than 30-50 bps at present.

Provisioning norm to raise commercial realty prices

Provisioning norm to raise commercial realty prices
Business Standard, October 28, 2009, Page 12

Raghavendra Kamath / Mumbai

Developers expect up to 75 bps increase in cost of funds

Developers said property prices were likely to go up after the Reserve Bank of India (RBI) increased the provisioning for commercial real estate. This, they said, would increase the cost of funds.

Developers expect up to 75 basis points rise in cost of funds after the central bank increased banks’ provisioning requirement for commercial real estate from 0.40 per cent to 1 per cent.

“I think affordable housing will become more expensive as banks will raise rates and credit offtake will slow. Availability of bank funds will become a big issue for developers now. We will bank more on our sales and instead of raising additional funds. We will focus more on internal accruals,” said Sarang Wadhawan, managing director of HDIL, a Mumbai-based developer. “Execution of projects will suffer due to lack of bank funds,” said Wadhawan.

A number of property developers such as DLF, Unitech, HDIL and Lodha, among others, have ventured into affordable housing since the third quarter of the previous financial year to beat the slowdown in property sales. The projects are 25-40 per cent cheaper than market prices and carry margins of 15-20 per cent as against the luxury projects’ margins of over 50 per cent.

“It will certainly increase our cost of borrowing. We will consider this increase like any other increase in input cost,” said Bharat Mody, chief financial officer of Akruti City.

RBI increased provisioning as it felt that credit flow to commercial real estate had risen sharply and there had been large increases in restructuring of loans by developers. Some top developers of the country such as DLF, Unitech and HDIL have restructured loans worth Rs 10,000 crore after RBI allowed banks to do so.

“The amount of non-food bank credit going to commercial real estate is very small, I believe around 3.7 per cent. However, our decision was prompted by two considerations. First, the rate of growth of credit through CRE has been accelerating at one of the fast rates. Second, we looked at the restructuring done by banks. While the restructured portion at the aggregate level was 4 per cent, it was 14 per cent for the real estate sector. This prompted us to raise the provision requirement for the real estate sector,” RBI Governor D Subbarao said at a press conference in Mumbai today.

Loans to the real estate sector grew 41.5 per cent in the 12 months up to August 28, 2009, to Rs 96,701 crore. On the other hand, total non-bank food credit grew 13.3 per cent in the 12 months up to August 28, 2009, to a total outstanding of Rs 26,23,551 crore.

In November last year, RBI had reduced the risk weight on loans for the commercial real estate industry to 100 per cent from 150 per cent and reduced standard asset provisioning requirements to 0.40 per cent.

This was after the developers met the finance minister to express concerns over liquidity. Apart from drastic fall in property sales, developers were facing severe liquidity crunch as bank debt and foreign borrowings dried up and domestic stock markets fell sharply.

Analysts said developers would now find it difficult to raise funds. “It will be challenge for developers to get bank debt. Financial closure will become difficult for real estate projects,” said Ambar Maheshwari, director of investments at DTZ, an international property consultant.

However, developers say since many of them have restructured debt or reduced their debt levels, the RBI move will have less impact on their existing loan portfolio. “If we go for additional funding, the cost will be higher. It will not have much impact on our existing debt,” said Sunil Malhotra, vice-president, finance, at Omaxe, a New Delhi-based developer.

Bankers also say the RBI move will not lead to any drastic rise in rates. “This (increase in provisioning) may not translate into a sharp rise in lending rates. The interest rates are already low and any small increase can be absorbed,” said a head of treasury with a private bank.

A senior State Bank of India official said there could up to 40 basis point rise in interest rate on loans disbursed to builders. This would be done to offset the additional amount that banks would have to set aside for standard real estate assets.

Sensex tanks 387 points

Sensex tanks 387 points
The Hindu Business Line, October 28, 2009, Page 1

Our Bureau, Mumbai

The Monetary Policy seems to have disappointed the stock market. The bellwether Sensex shed 387 points on Tuesday to close at 16,353.4 points and the broader Nifty ended the day lower by 2.5 per cent at 4,846.7.

Though there was no rate hike, the RBI signalling the end of its easy money policy led to heavy selling in banking and realty stocks, brokers said.

The BSE Realty index fell by 6.24 per cent, the biggest loser among the sectoral indices, followed by Bankex by 3.82 per cent.

The RBI has made funds more expensive for some sectors. The feeling that inflation is weighing on the minds of policy-makers and a rate hike is likely in the near future unnerved investors. Global cues were also negative. All these pulled the market down sharply, said Mr Avinash Gupta, Assistant Vice-President for Research Equity at Bonanza Portfolio.

Traders booking profits ahead of this month’s Futures and Options’ expiry on Thursday also drove down the market further.

FII were net sellers of equity for Rs 548.7 crore, while domestic institutions were net buyers for Rs 141.5 crore.

The market breadth was negative as 2,287 scrips declined while 442 advanced. All sectoral indices on the BSE ended the day in the red.

Wipro, Tata Motors and Hindustan Unilever were among the few Sensex gainers. The biggest losers included Hindalco, Tata Steel, Bharti Airtel and Reliance Communications.

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.”