RBI's Booster Dose

The Realty segment appreciates the measures brought in by RBI to mitigate the economic impact of Covid - 19.  Views from the industry…

TIMELY AND EFFECTIVE

The timely and effective steps taken by the RBI to mitigate the economic impact of Covid-19 and maintain financial stability in the country is highly appreciated. The RBI has announced several laudable measures including special lines of liquidity, loan moratorium, deferring of working capital interest to ease the stress in these challenging times.      

We welcome these commendable steps by the RBI for reducing the Repo rate by 75 BPS and Reverse repo rate by 90 basis points to 4%.  This is likely to reduce EMI's for borrowers and make new home loans cheaper. The RBI has also permitted financial institutions to allow a three-month moratorium on monthly installments on all term loans. This much needed move in these times will hugely benefit homebuyers and the real estate sector.

The rate cut is further expected to complement other monetary measures such as the deferring of working capital interest, reduction of CRR for all banks by 100 basis points should address liquidity challenges faced by NBFCs and banks by easing investment inflows into the country. These accommodative measures will ensure that adequate liquidity is available to all constituents and Covid-19 related liquidity constraints are eased. 

A BIG RELIEF!

The RBI's much - needed liquidity infusion of Rs 3.74 Lakh crore into the economy comes as a big relief for the country, its markets and the people who are battling a Covid - 19 war in already prevailing recessionary conditions. The repo, reverse repo rate and CRR cuts would extend more lending powers to the banks. It's an attempt to ensure financial stability and confidence that the financial markets needed. A moratorium of three months on repayment of loans and interest thereon, with a further assurance of not classifying such assets for downgrading, will give relief to the homebuyers and businesses. It will ease them from financial burdens and help them plan financial priorities better in this challenging time. The RBI has also assured that the banking system was sound and there was no need to be panicky about it. But, all this has highlighted a fact that the real estate is a safe asset - class, as it is a physical one. This is evident when cash flows and liquidity have impacted all other asset classes severely.            

REASSURING INITIATIVES

The steep cut in the repo & reverse repo rates by 75 and 90 basis points is in-line with announcements made by Central Banks across the world, to mitigate the impact of the Coronavirus. The 3 month moratorium for borrowers is a huge relief for individuals. At a time when there is a looming concern of the economy slipping into a recession, the announcements by the finance minister, yesterday and the RBI today depicts the responsiveness of our financial institutions. The relatively higher reduction in the reverse repo and the CRR is bound to push banks to look at increased lending, thereby ensuring attractive lending rates. We believe that with the Repo now, at 4.40% the banks will finally be passing the benefits of the current & previous rate cuts to the customers. This will reduce the borrowing cost for the home-seeker significantly and have a positive impact on Real Estate. The commitment by the RBI Governor to tackle the evolving situation by making use of the many arsenals at its disposal is very reassuring.   

CRUCIAL IMPETUS

Today's economic package of 1.70 lakh crore for the weaker sections including daily wagers, construction workers, widows and other would prove to be a crucial impetus. The FM's directive to state governments to release 31,000 crore for the welfare of construction workers will help support the families of millions to sustain themselves and quickly bounce back to normalcy when this is over. The much-anticipated package which is a mix of food security and direct cash transfer would mitigate immediate effects of the lockdown on the large set of population through upfront spending. I am certain that the government is closely monitoring the situation and would extend the support in future as well.               

A SIGNIFICANT MOVE

This is a very significant move with substantial monetary policy intervention at a time when Covid -19 has impacted the economy at large. This is in conjunction with economic package announced by the finance minister yesterday for the poor. In addition to other benefits, the package is expected to benefit 3.5 crore registered construction workers. This is also a perfect orchestration of the joint efforts. by the Central government, State governments and the Central Bank to deal with this global health crisis. 

In these unprecedented times, the 75 bps rate cut (bringing down current the repo rate to 4.4%) combined with a reduction of 90 bps in reverse repo rate and other measures to infuse liquidity into the system is a welcome move. The repo rate reduction has even breached the 2009 level mark when the economy was hit by the global financial crisis and the policy rate fell to 4.75 per cent. This is to ensure revival of growth, mitigate impact of covid19 while containing inflation. The reduction in reverse repo rate will encourage banks to resort to enhanced lending to productive sectors of the economy at a time when growth of credit is slowing down.  

It shows the central bank's willingness to use all the instruments at their disposal to mitigate the impact of a global pandemic on the functioning and the stability of the Indian economy and the financial sector. The injected liquidity of 3.74 lakh crores along with the 3-month moratorium on all term loans by financial institutions will alleviate short-term liquidity concerns and help developers as well as home buyers  survive in these uncertain times. It is a big relief for developers and homebuyers to help them mitigate the challenges faced by them currently. It is pertinent to note that total outstanding loans of real estate developers from Commercial banks, NBFC s and HFCs is estimated to be around INR 4.5 lakh crore as of March 2020. At the same time, this moratorium will definitely benefit homebuyers as these financial institutions have lent an estimated INR 20 lakh core as of March 2020.               

 It is important for immediate transmission of these rate cuts to the home buyer which will boost consumer sentiment. The state governments should also take necessary steps to utilise the cumulative INR 31,000 crore funds for the welfare of building & construction labourers to help those who are severely impacted by the economic disruption on the back of the lockdown. 

THE MOVE TO PUSH THE CREDIT FLOW

RBI's latest announcement of a massive repo rate cut of 75 bps coupled with three months moratorium of EMIs on all outstanding loans is the biggest move that India has so far made to counter the Covid-19 fallout. The move will push credit flow into all industries reeling under the impact of the coronavirus.         The repo rate cut will I fuse cash flows into the system and ensure that consumption disruption is minimised. It will effectively benefit all sectors, including real estate.               

Given this time period, RBI will ensure that the benefit of the rate cut is directly passed on to actual consumers, which could eventually translate into more home loan takers. Additionally, This move of the RBI encourage banks to lend more and also enable industries to borrow. The moratorium of three months of EMIs on all outstanding loans will be a major relief to all concerned stakeholders, including home loan borrowers and developers. Developers now get breathing space to get their financial act together, at least for now. Moreover, the fact that non-payment of EMIs will not cause loans to turn bad is a major relief.            

All in all, this big-bang announcement by the RBI will benefit all industries in the country, and is undoubtedly the most convincing intervention yet to tame a major economic crisis in the country. 

TO EASE THE FINANCIAL BURDENS

The struggling real estate sector and the home buyers trapped in Covid - 19 worries, have been relieved a bit with the RBI's measures. While the repo, reverse repo and CRR cuts would increase lending powers of the banks to the businesses, a suggested moratorium of home loan instalments and interests thereon, which the banks should implement with immediate effect, will ease people from financial burdens.

It will support our business continuity plans, as well, because more liquidity will help the homebuyers schedule their buying plans in the short run.   

In this volatile environment, the real estate has been and will further be proved as the most secure investment. The rental yield in the residential asset class will be between 2-5% basis the size and location of the apartment and coupled with about 5-7% of internal rate of return on capital appreciation over five years horizon. This will make the real estate investment a safe heaven for investors with a total yield of 7 to 10% as returns. It will pave ways for positive arbitrage - investing in the residential real estate category, which has been almost non - existent for the last
decade or so.

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