Indian Real Estate: Reaching new heights

April 13th, 2018

RBI’s Monetary Policy positively impact the real estate sector of India

Reserve Bank of India was founded on April 1, 1935, in response to the economic troubles faced by the country after the First World War. The RBI was conceptualized based on the guidelines offered by the Central Legislative Assembly as the RBI Act 1934. Since then the Reserve Bank of India is vested with the responsibility of creating and piloting policies with regard to the use of monetary instruments under its control in order to attain some objectives concerned with the growth and stability of Indian economy.

The preamble of the Reserve Bank of India describes the basic functions of the reserve bank as:

“To regulate the issue of Bank notes and keeping of reserves with a view of securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage; to have a modern monetary policy framework to meet the challenge of an increasingly complex economy, to maintain price stability while keeping in mind the objective of growth.”

The Monetary policy is a process through which the government, central bank or the monetary authority decide the management of the liquidity (money supply, availability and the rate of interest) of the economic growth of the country with a prime objective to manage and control inflation followed by reduced unemployment. This liquid cash includes credit (includes loans, bonds, and mortgages), cash, cheque and mutual funds.

The impact of the monetary policies can easily be understood through the country’s Gross Domestic Product which is a financial measure of the market value of all the final goods and services produced in a stipulated time period (quarterly or annually). The GDP estimates are commonly used to determine the economic performance of the country and provide a report card for the current monetary policies. It also helps in making a comparison of Indian and the international markets.

The second largest employer of India after agriculture, the Real Estate sector is allied and affected by the economic changes taking place in the country. With a contribution of 5%-6% in the country’s GDP, real estate is an essential contributor to Indian economy which attracts and draws the foreign direct investment resulting into triggered economic settings of India. The RBI’s monetary policies directly impact the growth and development of the construction sector in India.

After a downfall for almost half a decade, 2017 witnessed an upsurge in the economic conditions of the real estate sector with market appreciation of 10.5% in 12 months. Until June 2017, the Indian Real Estate grabbed a spot among the top 10 international markets. The ongoing slow growth of the real estate sector enforced the government to revise their monetary policy and the RBI further lowered the REPO rate which positively impacted the real estate market as banks were able to offer bank loans at more attractive interest rates. Cheaper home loans triggered the market and home buyers were influenced to buy residential property. The new home loan borrowers paid a lower rate of interest rate as compared to the old loan debtors.

In recent years the real estate sector has experienced massive changes and the revised REPO rates resulted into the boom in the real estate sector followed by the increased purchasing power which is attracting buyers and national and global investors, lower rate of interest for home loans. This resulted in the manufacture of more residential and commercial properties which upturned the face of the construction segment.

After a decade-long slowdown in the real estate sector, the industry is now allayed and confident in reviving the property investments. The changes in the repo rate made by the RBI along with other changes in the economic framework of the country enabled the real estate sector to reach new heights by turning productive and rewarding for the buyers and developers.

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