However, RBI’s move will raise the cost of borrowing for banks which leverage high on their CASA funds
Interest rates on money lying in savings bank (SB) accounts will go up by half a percentage point, with the Reserve Bank of India deciding to hike rates to 4%. Deposit-holders in SB accounts were receiving the rate fixed eight years ago.
However, the move will raise the cost of borrowing for banks which leverage high on the 'Current Account, Savings Account' (CASA) funds. These CASA deposits are much cheaper than the time deposits, where the going rate for 6 months and above is about 8%.
Unlike the time deposits, the SB account interest rates are still regulated even as the central bank has put out a discussion paper for freeing the same. Interest rates on fixed deposit schemes were deregulated in 1997.
The bank is scouting for a strategic partner, and will enter the business by January next year
The country's fourth-largest public sector lender, Bank of India (BOI), is planning to re-enter the mutual fund (MF) business by January 2012. The bank has already started scouting for a strategic partner for the venture and is likely to finalise its partner by the end of the second quarter and will hold a majority stake in the business.
Earlier, in 1990, the bank had entered the MF business by launching six schemes, but subsequently exited the business. Presently, it is selling other mutual funds through its network of more than 2,000 branches which will be the added advantage for its mutual fund business foray.
The wide branch network that state-run banks have, translates into a valuable distribution system for asset management firms after last year's regulatory moves that barred them from incentivising agents through investors' money. That has made public sector banks attractive to asset management firms, both as joint venture partners as well as third-party distributors.
With RBI tightening interest rates further, it’s doubtful that the traditional occasion for new beginnings will change much in the troubled sector
Friday, 6th May, is Akshaya Tritiya, traditionally an auspicious day for beginning new ventures, even making new investments. After Diwali and Gudi Padwa, Akshaya Tritiya is another occasion when there is hectic activity in the real estate sector. But this year, with the Reserve Bank of India (RBI) tightening monetary policy in the backdrop of already unaffordable prices, the woes of developers are likely to get worse.
The RBI today increased its lending and borrowing rates by a larger-than-expected 50 basis points with the aim of containing inflation. Naturally, the real estate sector, which has been under a lot of pressure, is not happy. “Banks have already taken a cautious approach, as a result most developers now raise a larger component of their construction costs from the private sector. These loans come at a higher cost. The latest rate hike obviously means that the cost of construction will go up further for developers,” said Ashutosh Limaye, strategic consulting, Jones Lang LaSalle India. For home buyers, Mr Limaye said, the likely consequent hike in loan rates will be a further deterrent.
RBI’s rate-hardening measure will dull Akshaya Tritiya celebrations this time. Liases Foras, the property research firm, has reported that Mumbai is going through its worst-ever period for property sales in the last two years. About 105 million sq ft of property space remains unsold and there has been a 27% drop in deals since the December quarter. The weighted average price of homes has gone up to a record Rs9,234 per sq ft. “The market is heading for bad times,” said Pankaj Kapoor, managing director, Liases Foras. “Prices must correct.”
Of course, many builders will try discounts and special offers in the hope of offloading stock, but there will not be many takers. Already, developers are offering a variety of concessions like free parking space, price discounts on bulk bookings and discounts in lieu of cash payments. Still other builders continue to hold stocks at inflated prices.
In all likelihood, the bleak period will continue, with few customers venturing to make a purchase at the prevailing sky-high rates.
“Interest rates on home loans are expected to increase, mirroring the 50 bps hike in policy rates. This, coupled with the steep rise in property prices over the past year will moderate the demand for home loans in the short term. Also, existing borrowers could see the instalments on their loans go up,” said Anil Kothuri, EVP , Edelweiss Housing Finance.
For those keen on real estate investment, Mohammed Aslam, joint city head, Jones Lang LaSalle Pune, advised not to judge value of a property by the cost of land alone. “The general state of the locality, the roads, availability of shopping and grocery outlets, basic entertainment and transport facilities, schools, medical establishments should also be checked out before purchasing a property,” he said. This is probably correct, but in the current scenario, it’s the price that is the first and most important factor that will determine if very much is going to change.