The Hindu Business Line : RBI concerned over hike in lending to realty sector

Ahead of the quarterly review of the monetary policy, the Reserve Bank of India has drawn attention to the sharp hike in lending to the commercial real estate sector. Year-on-year growth in such lending has touched nearly 70 per cent , the RBI said in its Report on Macroeconomic and Monetary Developments here on Monday.

The outstanding loans to real estate jumped to Rs 46,295 crore as on May 25, 2007, from Rs 27,285 crore a year ago, a rate of growth that the RBI felt was still high.

However, the string of rate hikes by the RBI has begun to take effect on non-food credit growth. Non-food credit by scheduled commercial banks has moderated to 24.4 per cent year-on-year (Rs 3,67,258 crore) as on July 6, 2007, from 32.8 per cent (Rs 3,70,899 crore) a year ago.

On inflation, the RBI maintains its projection of 4-4.5 per cent. “The resolve, going forward would be to condition policy and perceptions for inflation in the range of 4-4.5 per cent. The objective would be conducive for maintaining self-accelerating growth in the medium term.”

The inflation based on the wholesale price index which was above 6 per cent in early April eased to 4.4 per cent by July 14.

The RBI hints that there could be a downside risk to the global economy due to a sharp slowdown in the US housing market. “Such developments could lead to greater volatility in capital flows to emerging markets,” said the RBI.

“Rapid growth in hedge funds activity is a cause for concern among the regulators as these funds are largely unregulated and governed by opaque investment partnerships,” the RBI added.

Private equity flows

The report said that private equity funds have also emerged as a key source of capital flows to emerging economies. But private equity flows to emerging markets could also witness large retrenchment on the back of further monetary tightening in major economies.

“The consequent volatility in global financial markets could lead to large swings in capital flows and exchange rates and could have an adverse impact on the real economy,” the report added.

During 2007-08 (up to July 13, 2007), FIIs registered net inflows of $8.4 billion compared with outflows of $2 billion in the corresponding period of 2006-07.

The RBI says that liquidity conditions continued to be influenced by movements in capital flows and cash balances of the governments.

While bank’s deposit and lending rates rose during the first quarter, the RBI notes that there was some softening in deposit rates in July.