High lending rates may lead to slump in realty market: DLF

"...Because of mortgage rate and monetary policy, there is no doubt that the market has got subdued at this moment," K.P. Singh, chairman, DLF, said, noting industry reports that claimed residential property sale had dropped by 70 percent in May-June this year.

"There is a slowdown on the mortgage side of the market," Singh said, adding that in spite of a slide in real estate prices, high interest rates were deterring people from buying new houses.

However, Singh said that the market slump was "temporary" and "once the interest rates drop, demand will pick up."

The central bank should reduce interest rates from a five-year high, Singh suggested.

"I don't agree with the monetary policy and I want the interest rates to be reduced," Singh, the second richest man in India, said at a press conference in New Delhi, September 18.

"The earlier they do it, the better," he added.

Anshuman Magazine, managing director of CB Richard Ellis Group Inc., a New Delhi-based real-estate adviser, agrees.

"The rise in interest rates is definitely one of the major factors that is deterring home buyers," Magazine said, noting how prices have dropped in the NCR (National Capital Region) by 25 percent earlier this year ever since the RBI raised interest rates six times in the past 18 months.

India's central bank has been raising interest rates to curb inflation and prevent the economy from overheating. It has raised the repurchase rate, or the rate at which it injects funds into the banking system, to 7.75 percent.

The central bank has since December increased the cash reserve ratio by 2 percentage points to 7 percent to slow down loans growth. The Reserve Bank is scheduled to make its next monetary policy announcement at the end of next month.

According to a report published by the Indan business lobby group, the Associated Chambers of Commerce and Industry of India (ASSOCHAM), the increase in home loan rates to 12 percent this year from 7 percent in 2003 has raised borrowers' monthly liability by about $82 (Rs. 3,250).

The monthly earning of an average middle-class family in India is between $500 to $1000 (Rs. 20,000 to Rs. 40,000).

Earlier, India's largest private sector bank, ICICI Bank's managing director and CEO K.V. Kamath had said that high interest rates would cause a slowdown in mortgage-backed loans and impede growth of industrial sector.