Unsold inventories piling up: Need low rates to lift housing market, says Arun Jaitley

Speaking at The Economist India Summit 2016, Jaitley said the housing market had picked up during former prime minister Atal Bihari Vajpayee’s government primarily due to lower interest rates.

Written by Sunny Verma , Sandeep Singh | New Delhi | Published:September 8, 2016 2:06 am
arun jaitley, jaitley on home loan, RBI, gst, arun jaitley on gst, india news, business news Finance Minister Arun Jaitley with American Journalist Max Rodenbeck at ‘The Economist India Summit’ in New Delhi on Wednesday. (Source: PTI)

TWO DAYS after Urjit Patel took charge as the Governor of Reserve Bank of India (RBI), finance minister Arun Jaitley said that the government wants to slowly push the economy towards a low interest rate regime to help resurrect the housing market.

Speaking at The Economist India Summit 2016, Jaitley said the housing market had picked up during former prime minister Atal Bihari Vajpayee’s government primarily due to lower interest rates.

“(The) housing market in India, it had picked up. During Mr Vajpayee’s government, bank rates had come down to such an advantageous level that it was easier to buy an apartment than rent it out. That sort of situation had existed where the EMI has been reasonable. I think that’s the direction in which we have to slowly push our economy,” said Jaitley, in response to a query on how the government plans to improve the stressed housing market. If inflation remains under control, interest rates will stabilise and even come down, which would boost the housing market, said Jaitley.

During Vajpayee’s term (1999-2004), the floating rate on home loans had come down from around 12 per cent in 2001 to around 8 per cent in 2004. This was in line with the sharp cut in the repo rate by the RBI, from 8.75 in April 2001 to 6 per cent in March 2004.

In the recent past, while the RBI has cut the repo rate by 150 basis points from 8 per cent in January 2015 to 6.5 per cent now, home loan rates have come down from around 10.25 per cent to 9.4 per cent. The housing market faces twin challenges of huge unmet demand and a pile-up of a significant number of unsold inventories across the country.

This NDA government has placed special focus on providing affordable housing to citizens, and low interest rates are key in achieving that goal. Under the Pradhan Mantri Awas Yojana, the government provides an interest rate subsidy of 6.5 per cent on home loans up to Rs 6 lakh for economically weaker sections and lower income groups.

Former RBI Governor Raghuram Rajan had faced criticism from within the BJP for keeping interest rates high. BJP Rajya Sabha MP Subramanian Swamy had said that the high interest rate policy of the RBI under Rajan had damaged the economy. Even as the RBI has cut its lending rate — repo rate — by 150 basis points since January 2015, the median base rate of banks have declined only 60 basis points.