Expectations were running high earlier this month that the Reserve Bank of India would be easing the critical rates during the latest round of Monetary Policy Review. It was highly illogical for the financial community to expect a downward revision of rates at a time when the price indices were showing some decline, without the basic parameters indicating a structural improvement. It is no great secret that the whole sale and retail price indices can easily be made to look improving or deteriorating without the basics being affected. This is because the price levers are exclusively in the hands of the trading community and whenever they want to influence policy changes one way or other they resort to this lever. The RBI stand may look arbitrary since certain major investors like Jhunjhunwalla expect the NSE to notch up a phenomenal growth over the next sixteen years. The RBI too has its long term projections of the country’s economy, but it is bound to act in the short term when it comes to policy rates for the near term.
Some positive signals have emerged in the sector of finance for real estate and construction industry. The most important of these is that the Central government is finalising the norms for foreign direct investment in the construction industry. The thrust is reported to be on making it easier for such investors to exit quickly, instead of being hindered by the old stipulation that they should stay invested for a minimum of three years before they can quit. On the face of it, this may look like a reform, but in fact it is an invitation to mayhem. The lock in period was prescribed after the experience of the Asian Tigers where the investors had pumped money into real estate, riding a bull run on the bourses, but withdrew the capital abruptly, leaving large numbers of projects unfinished and making the real estate scenario looking like a graveyard. Heaven forbid, but we can’t afford a repeat of that nasty experience.
A welcome sign, so far missing in the sector is that astute business houses like Azim Premji’s Premji Invest have started investing in the sector, which they previously tended to avoid. The Indian investors would be slow to invest, but they know the local market far better than the foreign institutions and are also quick to act once they make a decision to invest. Thus, when they invest, they would not arbitrarily withdraw the money and push the economy into a crisis.
Another sign of hope is that the banks are considering offering floating rates for home loans, in order to stimulate demand. When the banks themselves have started reducing their own borrowing rates, there is an all round expectation that the policy interest rates may be lowered by the Reserve Bank, there would naturally be a reluctance to commit a liability with higher interest. Borrowers would rather wait for the actual rate to be known. Smart bankers would rather close the lending transaction with the offer to let the borrower seek a revision of rate as and when it becomes advantageous to him/her. Against the backdrop of the banks accumulating huge cash reserves, such initiatives are good for both the sides.
Floating rate home loans are the better option when faced with uncertain situations, since they offer a chance to rectify adverse conditions. But they are not coming without their own share of problems. This is because such changes of rates involve certain charges, and unless the cost of changeover is less than the benefit from the change, it is useless to switch rates.
A curious phenomenon witnessed during the fortnight was the climb back of DLF shares in the market despite a sharp decline following the SEBI imposing a ban on the company on grounds of alleged non-disclosure of critical information during IPO issue. What is anyone to make of this investor behaviour? Are they disbelieving the Regulator’s claim or happily condoning the company’s conduct? The only apparent reason cited by market watchers is that investors are confident the company would win the appeal awaiting decision at the Securities Appellate Tribunal. A classic case whetting one’s appetite on a pie in the sky!
