Mumbai:Housing Development Finance Corp. Ltd (HDFC) chairman Deepak Parekh does not advocate an aggressive rate hike by India’s banking regulator to fight rising inflation. In an interview for Banker’s Trust, a new show from Mint and Bloomberg UTV (to be aired on Bloomberg UTV on Thursday), Parekh said a 25 basis points (bps) hike in the policy rate of the Reserve Bank of India (RBI) is ideal, and the Indian central bank has never been behind the curve.
RBI will announce its annual monetary policy for fiscal 2011-12 on 3 May, and many economists are pushing for a more aggressive 50 bps hike. A basis point is one-hundredth of a percentage point.
RBI has raised its policy rate eight times since March 2010 to 6.75% to rein in inflation which has been persistently high. Average monthly inflation in 2011 has been 9.4%, much higher than the the central bank’s projection, which was revised upwardly twice during the year.?“RBI needs to be complimented for its baby steps and not disruptive steps,” Parekh said. “A quarter percentage rate hike to tackle inflation is a good policy; it is not disrupting industry. The industry is not expanding not because of high interest rates, but because of other constraints and impediments.”
“We have to live with some amount of inflation, if you want high growth. You cannot have a system where you have 9-10% growth and 2% inflation,” he said.
Parekh does not see any impact of the rising cost of home loans on demand for loans, but said that if rates continue to go up, demand will come down, and at this point the growth drivers are relatively smaller cities and towns where property prices are not as high as in cities such as Mumbai and Delhi.
He also does not see any bubble in the real estate sector, and said: “I don’t see that the commercial prices are going to go up in a hurry, whether for rental or for purchase.”
In the retail segment, prices have actually come down. “A large numbers of malls across the country are empty. Existing tenants are not renewing leases because of lack of demand. Rents across India have come down in retail space and will come down further because of empty space and new construction of malls and shopping areas.”
He has moved the government seeking changes in the foreign direct investment norms that classify HDFC as a foreign company, since foreign investors own more than 51% of the firm. HDFC Bank Ltd, ICICI Bank Ltd and Infrastructure Development Finance Co. Ltd, among others, are classified as foreign entities under the new norms, and this affects their downstream investments. Since they are classified as foreign firms, their investments would need approval from the Foreign Investment Promotion Board (FIPB).
“With downstream investments, we feel constrained,” said Parekh. “For instance, we invested a very small amount—Rs 5-7 crore in a affordable housing project, a first of its kind in Bangalore. The developer is a well-known professional; he is making homes of Rs 3.5-5 lakh. They needed an FIPB approval, which took three months. Their legal advice was that because we are foreign, they need to take an FIPB approval, which delayed our investments, the formation of his company, the project.”