RBI rate hikes may script rough chapter for auto, realty sectors

RBI rate hikes may script rough chapter for auto, realty sectors: analysts

The central bank’s seventh round of rate increases this fiscal year has analysts predicting a rough chapter for the interest-sensitive auto and realty sectors.
“A combination of fuel prices and interest hike will impact sales up to a point. I would think the hardest hit would be those that are looking to upgrade from say a two-wheeler to a car,” said Kumar Kandaswami, leader, manufacturing, Deloitte India. “In these segments, buying decisions may get postponed. Or the potential buyers may choose to stay within their current segment,” he said.
To rein in a stubbornly high inflation, the Reserve Bank of India (RBI) on Tuesday raised its short-term lending (repo) and borrowing (reverse repo) rates by 25 basis points each, to 6.5% and 5.5%, respectively. A basis point is one-hundredth of a percentage point.
“If you see the hike, it is marginal. But when you take in account the numerous hikes...this fiscal, the difference goes up to 150-200 basis points. So, that is a concern,” said Vaishali Jajoo, auto analyst at Angel Broking Ltd.
In 2010, through six rate increases, RBI raised its main lending rate, or the repo rate, by 150 basis points to 6.25% and reverse repo rate by 200 basis points to 5.25%.
On 15 January, the government raised petrol prices for the second time in a month because of a global escalation in crude prices.
Petrol and diesel prices have gone up by at least Rs.5.50 in a span of 30 days.
Add to this, increases in vehicle prices by auto manufactures due to factors such as rising input costs, higher excise duty and adoption of new emission norms.
“The rate hike will impact sales. As we still have at least 70% of vehicle buyers still go for finance as a option,” said Sandeep Singh, deputy managing director, Toyota Kirloskar Motor Pvt. Ltd.
“This (rate hikes) will have some impact as vehicle and oil prices have also increased in January,” said Rakesh Batra, partner and industry leader (automotive practice) Ernst and Young, India.
India’s auto industry grew at 30.92% to sell 14.8 million vehicles in 2010. Industry lobby group Society of Indian Automobile Manufacturers, however, has said a similar growth may not be possible this year as the base rate has tapered off.
It has predicted a 16-18% growth in 2011.
The rate hikes are putting pressure on developers as well.
“There are already a number of negatives such as overpricing at play in the residential real estate sectors of large cities like Mumbai and Delhi,” said Sanjay Dutt, chief executive of property consultancy Jones Lang LaSalle India.
“RBI raising its lending rates will add to the stress already building up, and hasten the inevitable correction of at least 15-20% in the pricing of residential properties in the overheated central areas of these cities,” he said, adding such a correction was previously expected in six-eight months.
A combination of high supply and a distinct dearth of appropriately priced projects in the low- to mid-income segments could push homebuyers away from the market, resulting in a dip in sales in the short term, say analysts.
“The rate hike is a short-term measure,” said Niranjan Hiranandani, managing director of Mumbai-based realty firm Hiranandani Constructions Pvt. Ltd. “But if the rates continue to rise over a longer period, it is going to affect the realty business.”
“This sequential rise will impact affordability and sales,” said S.K. Sayal, director and chief executive officer, Alpha G: Corp Development Pvt. Ltd.
“Rising rates will lower the sales and dampen sentiments of buyers in the residential space. Certain markets like Mumbai, where prices were already high, were significantly impacted due to rising rates,” said Jai Mavani, executive director, real estate and infrastructure tax and regulatory practice, PricewaterhouseCoopers Pvt. Ltd.
Last year, residential prices in many cities returned to the peak levels of 2008. Premium projects in Mumbai, Delhi, Bangalore and Pune could not maintain the initial velocity of sales and overall residential sales began to drop noticeably towards the end of the year.
Cities such as Mumbai, Delhi-National Capital Region, Bangalore, Hyderabad and Chennai saw a supply of around 111,000 units last year, according to property consultants Cushman and Wakefield India.
It estimates that supply across these cities in 2011 is likely to increase by 50%.