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Update on policy measures
(This section includes excerpts from recent reports by the BofA-ML India
economist, Indranil Sen Gupta)
Expect 25bps hike in November, but pause thereafter
Our economist (Indranil Sen Gupta) expects the RBI to hike another 25bps in
November but more importantly pause thereafter as inflation is expected to come
off by December to 7% and 5.5% by March. In its last policy, RBI also pointed
that “..the tightening that has been carried out over the period has taken the
monetary situation close to normal…”
Tightening of provisioning norms for Realty loans
In the November policy we expect RBI to tighten the provisioning norms on banks’
real estate loans which could put some pressure on real estate stock in and around
the policy period as it would lead to higher cost on borrowing for developers. At the
peak of the market in 2007, real estate loans had a risk weight of 150% and
provisioning norm of 200bps. In the 2008 crisis, risk weight was reduced to 100%
and provisioning norm to 40bps as a stimulus. The stimulus was partially reversed
in November 2009 when the provisioning norms were raised to 100bps. These
measures could make the loans to developers costlier by 50-100bps.
But post the above event we don’t see any more policy risks to the sector as the
RBI is expected to pause. We believe with moderate policy rates, leading to
relatively low mortgage rates and corporate lending rates (though both are
expected to start inching up as deposit costs increase) should offer good
environment for the developers to outperform.
Inflation peaking
Inflation has started cooling off as expected by our economist. He is expecting
inflation to trend down to 7% by December from 8.6% currently and further drop
to 5.5% by March 2011.
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