Rising rates to spoil India's realty party

India's booming real estate sector might feel the pinch after RBI's decision to hike short-term interest rates, as a possible shift in bank lending away from the sector as well as an imminent hike in home loan rates could spoil the realty party.

Industry experts said that the RBI decision was likely to lead to a shift in lending from high-risk sectors like real estate to the lower-risk segments like retail.

The Reserve Bank of India on Tuesday raised both the repo and reverse repo rates by 25 basis points each in a development, which was broadly in line with expectations.

Jammu and Kashmir Bank's chairman and CEO Haseeb Drabu told PTI that there was likely to be a shift in lending from sectors with high risk weightage to ones with lower weightage.

"Effectively, this means a shift in focus from real estate to retail and SME segments," he added. Drabu said that the rate hike was in line with expectations and another hike of 50-75 basis points was likely in the next 12-15 months.

Meanwhile, a number of banks and housing financial institutions said after the RBI rate hike announcement that they were planning to hike their home loan rates.

However, the RBI has decided to keep the bank rate and the Cash Reserve Ratio, the percentage of bank reserves to deposits and notes, unchanged at 6 per cent and 5 per cent respectively.

Drabu said that RBI's decision to keep the Cash Reserve Ratio unchanged was not justified as RBI has stopped paying interest to banks on their CRR balances.

"One did expect that as a compensatory measure RBI would reduce CRR in a staged manner. This has not been done because of the inflationary pressures," he added.

Citigroup India CEO Sanjay Nayar said that a modest hike of 25 bps in repo and reverse repo rate by RBI, without a change in the bank rate and CRR, was in line with expectations.

"This policy action seems to be justified given strong continuing credit growth through the first quarter of this fiscal, rising crude oil prices, incomplete pass through and the need to manage inflationary expectations," Nayar said.

RBI has shown both the willingness and ability to respond swiftly on policy directions, even if it is a midterm response, between two policy review dates," he added.

While the industry experts said that the RBI decision was necessary to keep inflation under check and economic growth continuing on a decent pace, the problem is in the fiscal growth, which has not moved in tandem with the monetary policy initiatives.