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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