Infrastructure industry in troubled waters
The infrastructure and construction industry are in a spin, thanks to the surge in the repo and reverse repo rates.
The situation has put both the sectors under immense pressure and the going tough. Expressing concerns on the backdrop of RBI’s yet another hike in the repo and reverse repo rates by 25 basis points each–from 8.25% to 8.5% and 7.25% to 7.5%, respectively, Hemant Kanoria, Chairman and Managing Director, Srei Infrastructure Finance Limited said that it may well turn out to be the last straw to break the camel’s (industry) back.
The industry is extremely troubled with the spate of rate hikes and its unpleasant impact on the overall investment sentiments in India. “Our country needs huge investment in the infrastructure sector, and half of it is expected to come from the private sector. I am unconvinced how the private sector will be able to mobilise resources from domestic sources in this bizarre economic scenario. Constant depreciation in the rupee has further pushed up our import bills, which implies that the inflation in the country is no longer fuelled by domestic factors alone. The prices of key inputs, such as oil and coal are also expected to soar due to the rupee depreciation. The government, in conjunction with the RBI needs to fix the issue soon, else it may further trigger the inflation and bring down the overall GDP growth,” says Kanoria.
Anuj Puri, Chairman & Country Head, Jones Lang LaSalle India says, “The economy is showing signs of decelerated GDP growth, and the inflation has not abated despite flurry of interest rate hikes. Real estate developers are also facing high debt, and were looking forward to the festival season to improve sales. However, the constant increase in the home loan interest rates is likely to dampen the sales even further. Moreover, buyer sentiments on the residential market and the absorption rate are likely to remain toned-down for now.”
“This is indubitably buyers’ market, and the investment activity in the residential sector and the new launches will go to seed along with the growth in capital values. In a normal scheme of things, the current scenario would hasten a correction in metropolitan cities where residential markets have slowed down due to overly high product cost. However, developers continue to face a considerable liquidity crunch due to high cost of borrowing, compounded by sluggish sales. The RBI should rethink its seemingly one-dimensional strategy to combat inflation,” says Puri.
Commenting on the dismaying scenario, Sanjay Kabra, Chief Financial Officer, Sunil Mantri Group said, “Monetary policy alone cannot address the inflationary trend and the government needs to address the underlying economy. Further, inflation has not relented, despite 13 rate hikes by the RBI. The higher threshold rates correspondingly have increased hurdle rates for the economic growth.”
“Realty players as well as buyers are forced to bear the brunt of the constant rate hikes, and it will be fair to expect some respite going forward. I am not sanguine whether the 13th nominal rate hike of 0.25 % would be able to ward off inflationary forces, however, it will adversely threaten the growth and probably be counterproductive now. The real estate sector is reeling under unabated borrowing costs. The saving grace is that the robust 20% growth witnessed in the housing loan has added fillip to the demand,” says Mantri.
“The rising inflation fuelled by the rise in interest rate and the global economy slowdown has taken a toll on the real-estate sector,” says Babulal Varma, Managing Director, Omkar Realtors & Developers Pvt. Ltd.
“Any further rise in the interest rate will further cripple the sector. According to the urbanisation report, there is a major shortage of apartments in urban areas. However, there has been a 20 to 25% decline in the registration in Mumbai only. The transactions have slowed down and the rise in interest rates has jacked up the cost of the capital for the developer and the buyer equally. Hence, it is a double burden on the end user as the developer is forced to pass on the cost to the end user,” says Varma.