Indian equities declined yesterday, with the country's main benchmark dropping to its lowest in more than a month, extending six days of losses as the central bank increased key interest rates in a bid to curb inflation.
The Bombay Stock Exchange (BSE) Sensitive Index, also known as Sensex, was down 2.4 per cent to 18,534.69 points, its lowest since March 24. The Reserve Bank of India (RBI) made a larger-than-expected 50-basis-point increase, after inflation accelerated to 8.98 per cent in March. It lifted the repurchase rate to 7.25 per cent from 6.75 per cent and the reverse repurchase rate to 6.25 per cent from 5.75 per cent. Up to 25 economists surveyed by Bloomberg expected a 25-basis-point increase. RBI kept cash reserve ratio, the percentage of bank deposits they must keep with the central bank, unchanged at 6 per cent. Property stocks led the declines as investors speculated that developers facing interest rates above 20 per cent, may be forced to sell assets.
Ansal Properties & Infrastructure declined the most on the BSE yesterday. Shares fell 6.4 per cent to 40.85 rupees, while Unitech, India's second-biggest developer, lost 5 per cent to 36.15 rupees.
"The latest rate hike obviously means that the cost of construction has gone up for developers, and this move by the RBI certainly does not come at the best of times for them," said Ashutosh Limaye, a local director at Jones Lang LaSalle India.
"Banks have already taken a cautious approach to real estate lending and reduced their exposure to the sector, and most developers are now prevailed upon to raise a larger component of their construction costs from the private sector. The fact that such funds come at a higher cost of borrowing has already increased their construction costs significantly," said Mr Limaye.
India's property industry is set for large-scale distress sales as companies need to repay 1.8 trillion rupees worth of debt in the next two to three years, according to research by the local unit of Knight Frank, a London broker.
