RBI’s monetary policy not favorable to the sectors.
By R. Chandrasekaran
CHENNAI: The recent measures announced by the Reserve Bank of India on monetary policy will undoubtedly hit the automobile and the real estate sectors very badly in the coming months.
Both the sectors have already been facing the heat due to the higher rate of interest besides the higher food inflation crippling the consumers’ purses. The automobile sector has been reeling under downturn during the last over six months. The realty sector is trying to come out of the sluggishness, but it seems it will face rough weather in picking up in the second half.
For instance, Jones Lang Lasalle indicated an absorption rate of 40 percent more in Mumbai office space in the first half of 2013 over the previous year that witnessed 35 percent drop for the whole year. Also, despite the government’s liberalized policy of foreign direct investment (FDI) in realty sector, there has not been any significant off take from this sector.
By tightening the money policy, the central bank is trying to make sure that there is less money supply so as to ensure that there is no volatility in the Indian currency trading that has slipped over 10 percent after May. At the beginning of the year, there was some hope that interest rates will come down and 75 basis points were reduced by the Reserve Bank of India. However, the trend has changed dramatically in view of the weakening rupee and the chances of the central bank increasing the interest rate is not ruled out. This will force home or office buyers to postpone their plan of purchase. The real estate sector, therefore, depends on non-resident Indians to prop up their business.
In the automobile sector, more than the two-wheelers, it is going to be the four wheelers, especially commercial vehicles that will be hit very hard. For instance in June, two-wheeler sales slipped by 4.56 percent, whereas commercial vehicles dropped 13.45 percent and domestic car sales fell 9 percent.
The Society of Indian Automobile Manufacturers’ (SIAM) Director General Vishnu Mathur had already gone on record to say that “even in the 2008-09 downturn there were no such prolonged period of fall.” He was referring to the seventh straight monthly fall in car sales in May.
It is quite clear that in the first three months of the current fiscal year ending March 2014, the automobile sales have been witnessing a fall over the previous year period. The trend is not likely to be reversed in the next few months also.
The latest efforts by the RBI will only make short term interest rates harder and the borrowers will find it tough to negotiate rates too. This will put additional burden on the sales force of the automobile and real estate sectors personnel since the consumers will have to shell out more if they choose to buy.
Meanwhile, CRISIL sees car sales to drop 2 – 3 percent, whereas new home sales are predicted to be hurt by four percentage points as a result of the recent RBI measures. The fact that there will be additional pressure on steel and cement by approximately one percentage point will make the realty sector to struggle very hard to sell its inventories.
While the auto sector’s struggle for growth will continue, real estate sector will likely see the growth either slowing down or pushed down further.
To contact the author, email to rchandrasekaran@americanbazaaronline.com