The hike in interest rates in India gives NRIs an opportunity to reap
twin benefits.
The Reserve Bank of India (RBI) jacked up interest rates March 30 to control
inflation since this is the number one priority of the government. The
unexpected increase in interest rates sent a Tsunami to the Indian stock market
when it opened April 2 as it plummeted by over 600 points in a single day. The
market recovered quickly but the yo-yo effect has scared the investors.
For the long-term investor, this is the time to buy. And NRIs have amply
demonstrated this response when they pumped nearly Rs.1 billion in just two
months of February and March. In January they were sellers. Compared to Rs.80
million they invested in the same period last year, the trend now shows that
NRIs are bullish.
Earlier, NRIs were not investing due to high rupee-dollar rate and valuation
concerns. When the Indian market corrected, they returned. This was not the case
when the rupee appreciated and the market was at a new high. Now shrewd NRI
investors are on the lookout for entering the bearish market. The mutual funds
have also eased off and become attractive for the investor.
From April 2006 to January 2007, portfolio investment by corporate bodies,
foreign institutional investors (FIIs) and NRIs was $6.8 billion. Will the FIIs
and NRIs pull out in the bear run? Or invest for the long term? Mass exodus from
the market remains a far-fetched possibility due to solid basic economic
fundamentals and economy is still expected to grow around 7-8 percent. This
interest rate hike will cool the overheated Indian economy.
The market is expected to stay bearish because the cost of borrowing money has
gone up for the quoted companies. Thus the prices of their goods are likely to
go up. This means lower consumer demand. In due course, all this means lower
company dividends and so lower returns on the equity investment.
In the current uncertain scenario, it makes sense for the conservative NRIs to
wait a little because the market can go down further. Since no one can time the
market, the best approach is to gradually enter the equity market and mutual
funds over the next few months.
The second benefit for NRIs lies in buying property. Many NRIs dream of buying a
home in India for various reasons but astronomical prices ensured that these
dreams remained just dreams. Now NRIs can make them a reality by monitoring the
easing of prices.
High interest rates mean high mortgage payments; thus the property prices should
decline as the buyers find it difficult to pay the high monthly instalments. But
not in the short-term as most projects started over a year ago have been sold
out. Other housing units in recently launched projects with high prices have
also been mostly sold out. Builders will be wary of launching new projects with
higher costs unless they have substantial local or foreign funds.
The first effects of this trend could be felt after three to six months as most
property developers have the capacity to hold on to their new housing for the
short term. Another factor is the two to three months taken for approval of home
loans. The ones in the process may most likely continue after increasing the
repayment period but new buyers will be careful before taking on higher mortgage
payments every month. Thus the demand for housing should slacken and NRIs can
move in.
If an NRI wants to buy a house in the metros, the prices are not going to ease
off just yet. Property developers in the metros - Delhi, Mumbai, Chennai,
Kolkata and Bangalore - have deep pockets and can maintain their high prices for
over six months or longer. And they have overseas funds to develop new projects.
But the developers in Tier Two cities and towns will have to ease off earlier
and lower their prices if they have to survive. Prices are expected to decline
in the second half of this year in these cities and towns. The price decline in
these Tier Two cities could be steeper than the metros.
Gulf NRIs stand to benefit the most. Most NRIs from the Gulf region usually want
to buy a home for themselves and invest in real estate. Since their target towns
fall in Tier Two or even smaller townships and villages, they stand to benefit
the most from lower housing prices. Since metros have new companies opening
offices and requiring housing for their executives, their prices will hold on
for a while.
Now is the time for NRIs to wait and watch and reap the twin benefits of
interest rate hike.
Source: Yahoo news; 8th Apr’07
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