With the Reserve Bank of India (RBI) having announced a surprise rate cut yesterday 15th Jan 2015, the Indian markets indeed have something to cheer. Everyone seems to be wondering how this move will impact different sectors of the economy. While it's certainly clear that interest rate sensitive sectors will benefit the most not every stock will benefit equally.
That said, an economic development like this will surely have a trickledown effect on most companies in industries like construction, capital goods, auto, infra and manufacturing. Perhaps the sector to benefit the most will be real estate. This is one sector that is mired in problems ranging from corruption to poor execution. One rate cut might not have much of an impact. However, if the interest rates were to drift lower, it will act as a tailwind for the sector as a whole.
Let us have a look at the positives other than the rate cut. The government has allowed developers to raise funds from the public by the way of Real Estate Investment Trusts (REITs). SEBI has notified the rules for the same. A big push will be given by the Modi government for affordable housing. Rs 40 bn has already been allocated for this and more can be expected in the upcoming budget. This along with the government's plans for developing 100 smart cities is positive for the sector. The land acquisition ordinance has also made it easier for developers to acquire land for low income housing. In addition to this, the FDI norms for construction have also been eased. Falling inflation also brings relief to developers by the way of lower input costs.
While there is no denying the fact that the real estate sector has the potential for a rebound, we wouldn't hold our breath. Most of the wounds of the sector are self-inflicted. No amount of liquidity will help unless developers are willing to cut prices. This will only happen once India has a strong real estate regulator. This proposal has been pending with the government for a long time but we haven't seen much progress. So while 2015 might bring some relief to the sector, it is not possible to be positive in the long term.