The central bank today emphasised that a one-size fit all approach is not going to work in the domestic set up. Would that really mean that the domestic considerations are going to far outweigh any global considerations in terms of normalisation and the focus is going to be on growth even as inflation is continuing to rear its head once again?
Our understanding is that both the central bank and the government have clearly prioritised growth over inflation or any other challenge and despite them articulating that fairly clearly over the last few months, Moody’s has also acknowledged the stance taken by the government and has upgraded the outlook.
I believe there is great merit in what the government is doing coming out of Covid and the lockdowns. Growth needs to be prioritised and they are doing the right thing. One would expect interest rates to remain in a fairly tight range and they are benign and they are clearly helping the real estate sector to bounce back.
Real estate is amongst the largest employers in the country and the downstream effect of real estate is tremendous. Given that the government is pushing growth by keeping interest rates benign, in the process, several sectors including real estate are clearly benefiting from this move.
But the other thing that the real estate sector is grappling with is commodity price inflation. Could that in any way sort of derail the realty boom which seems to have just begun?
The realty boom on the residential side tends to be fairly longish both on the up and the downside. So when the markets were down, they were down for a good eight years — ever since 2013.
On the upside also one expects this to carry on for the next five to eight years. The good news is that at this point in time, real estate developers are focussed on clearing inventory and therefore are absorbing whatever increase in costs are happening in the near term. Real estate as a product is a step inflation product and one would imagine and desire as well that over the next year, year-and-a-half, the absorption by the developers would continue and they would be looking to use cash flows to reduce interest costs.
Even if interest cost reduction is offset by commodity price increases, that may not result in a positive margin impact for developers but clearly the interest costs would go down. The top five developers have apparently returned Rs 18,000 crore of debt over the course of the last six to eight months to financial institutions. That is clearly a result of interest rate costs going down which can get offset by some of the other costs getting absorbed. For the next year to two, prices would remain the same. There would not be much transmission of this input cost. After about two years, there would be step inflation and till that time the entire system is focused on just getting the momentum stronger.
