How does a rate hike by the Federal Reserve affect...

How does a rate hike by the Federal Reserve affect real estate in India?

Fed Chair Janet Yellen

On 14th December, the US Federal Reserve raised its benchmark interest rate by 25 basis points for just the second time since the 2008 financial crisis. The Federal Open Market Committee (FOMC), which concluded its two-day meeting, said that the inflation expectations have increased “considerably” and forecast a steeper path for borrowing costs in 2017.

“All the Federal Open Market Committee participants recognise that there is considerable uncertainty about how economic policies may change and what effect they may have on the economy,” Fed Chair Janet Yellen said, referring to changes new President Donald Trump is likely to implement.

Hers’s how the US Fed’s rate hike will Impact real estate in India

  • Real estate developers are different from companies, which are export-oriented. Exporters are likely to become wealthier when the value of the dollar rises, because they are paid in that currency. But, the revenues of developers of property in India are in Indian currency, the rupee. But, if they have debt that they owe in the US dollar, their debt would rise, as the value of the Indian currency will fall relative to the US dollar. When the dollar becomes strong, their debt would become more of a burden.

  • Increase in US Fed interest rates might lead to a tightening of money circulation across the world. The RBI (Reserve Bank Of India) might hike rates, too, and this might raise the borrowing cost Indian property buyers and property developers.

  • A sharp interest rates rise by the Fed pushes a decline in new launches, and spending on residential property.

  • However, when the rupee depreciates against the dollar, non-resident Indians (NRIs) would be more interested in investing in markets here. This is because investing in Indian real estate would become cheaper. This is especially true, if they buy ready-to-move-in properties in India. But, if they invest in under-construction properties in India, they are likely to gain from a strengthening dollar, but only if it remains strong. Their gains from investing in Indian real estate would also decline, if the dollar weakens while they make the payment in installments.

  • Property buyers, who invest in Indian real estate market, would benefit from the interest rate hike, if they convert their money from the US dollar to the rupee after the Fed hikes interest rates.

Swati loves writing on real estate! Before engaging in what she thinks is ‘serious business’. Currently, she is serving the role of Content Lead and shares her knowledge to appraise investors/end-users about Indian realty sector.