Property in India to suffer after Central Bank raises interest rates

Higher than expected inflation has resulted in India’s central bank raising interest rates in the country by double most forecasts.  Benchmark interest rates in the country have been raised by 0.5 per cent in May as the central bank struggles to control ever rising prices in the country.

Inflation at almost 9 per cent results in 0.5 per cent rise in rates

The Financial Times reports that the Reserve Bank of India (RBI) increased its two main monetary policy rates by 50 basis points in May as the bank warned that inflation was higher than expected.  Headline inflation jumped to 8.9 per cent in March, compared with an official RBI target of 4-5 per cent.

Duvvuri Subbarao, RBI governor said: “Elevated rates of inflation pose significant risks to future growth.  Bringing them down … even at the cost of some growth in the short run, should take precedence.”

The rate at which the central bank lends to commercial banks was raised to 7.25 per cent whilst the rate at which the RBI absorbs money from the system (the ‘reverse repo’ rate) was raised to 6.25 per cent.

Experts believe India property will suffer as a result of interest rate hikes

The increase is the ninth such rate hike in just over a year and experts believe that the property market in the country could be hit.  The FT reports that ‘Ashutosh Limaye, a director at Jones Lang LaSalle India, the property agent, said the rate rise would also hurt India’s real estate sector as companies struggle to raise funds amid high credit costs.’

Auestions have also been raised over the monetary policies of the Reserve Bank of India.  A.Prasanna, chief economist at ICICI Securities, said: “The 50bp hike is a clear sign they are starting to get a little desperate.  The RBI has few shots left to tackle inflation.”

Chandrajit Banerjee, director-general of the Confederation of Indian Industry, said: “The continued monetary tightening without any movement on structural reforms to address supply side bottlenecks will have an added impact on capacity creation and expansion.”