Jan 23, 2012|
Macroeco review: Bubble in residential bal. sheet?
The Macroeconomic Review, which is a precursor to the central bank's review of monetary policies gives a bird's eye view of the key risks and upsides in the near term economic trend. Interestingly, over the last few quarters, the highlight of the reviews has been the focus on inflation. This time, the set of headwinds that the Reserve Bank Of India (RBI) foresees are very different though.
The upcoming review of interest rate policy is a much awaited one given the impact it is likely to have on financial markets. While the government would prefer seeing interest rates cooling off and offering a boost to both GDP growth as well as corporate profits, the RBI may not yield to the demand so soon. Inflation certainly has shown some signs of getting tamed, but is nowhere close to the RBI's targets. At the same time, the RBI in its own judgment, sees GDP growth in the coming fiscal closer to 7% than to 8%. The accentuated pass through of exchange rate risks only confirms the downside risks to the RBI's estimates.
Given the muted expectation of economic buoyancy, the RBI is expecting balance sheets to shrink to adjust to the normalized growth rates. Both the government and corporate balance sheets have shown some adjustments to the tight liquidity scenario in the past 9 months. However, what is striking is the rise in liabilities in the household balance sheets. While savings to GDP ratio has remained largely stable, the propensity to borrow seems to have increased despite stiffness in interest rates. On one hand, this could be due to the expectation of benign rates going forward. However, on the other hand, if the RBI chooses to not lower rates anytime soon, the liquidity in residential balance sheet could become a matter of concern.
|Data source: RBI Macroeconomic Review|
Despite the deceleration in overall credit off-take, the RBI data showed that the growth in housing loans continued to grow at a higher pace on YoY basis. Higher housing loans coupled with price rigidities in the housing market reflect the continued pricing power with the developers as also the increasingly stretched balance sheets of residential buyers. The upcoming monetary policy review will therefore not just be indicative of whether the government and corporate balance sheets will face further stress but also whether retail leverage ratio is heading towards a bubble.
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