Interest hike means twin benefits for NRIs

The hike in interest rates in India gives NRIs an opportunity to reap twin benefits।

The Reserve Bank of India (RBI) jacked up interest rates March 30 to control inflation since this is the number one priority of the government। The unexpected increase in interest rates sent a Tsunami to the Indian stock market when it opened April 2 as it plummeted by over 600 points in a single day. The market recovered quickly but the yo-yo effect has scared the investors.

For the long-term investor, this is the time to buy। And NRIs have amply demonstrated this response when they pumped nearly Rs.1 billion in just two months of February and March. In January they were sellers. Compared to Rs.80 million they invested in the same period last year, the trend now shows that NRIs are bullish.

Earlier, NRIs were not investing due to high rupee-dollar rate and valuation concerns। When the Indian market corrected, they returned. This was not the case when the rupee appreciated and the market was at a new high. Now shrewd NRI investors are on the lookout for entering the bearish market. The mutual funds have also eased off and become attractive for the investor.

From April 2006 to January 2007, portfolio investment by corporate bodies, foreign institutional investors (FIIs) and NRIs was $6।8 billion. Will the FIIs and NRIs pull out in the bear run? Or invest for the long term? Mass exodus from the market remains a far-fetched possibility due to solid basic economic fundamentals and economy is still expected to grow around 7-8 percent. This interest rate hike will cool the overheated Indian economy.

The market is expected to stay bearish because the cost of borrowing money has gone up for the quoted companies। Thus the prices of their goods are likely to go up. This means lower consumer demand. In due course, all this means lower company dividends and so lower returns on the equity investment.

In the current uncertain scenario, it makes sense for the conservative NRIs to wait a little because the market can go down further। Since no one can time the market, the best approach is to gradually enter the equity market and mutual funds over the next few months.

The second benefit for NRIs lies in buying property। Many NRIs dream of buying a home in India for various reasons but astronomical prices ensured that these dreams remained just dreams. Now NRIs can make them a reality by monitoring the easing of prices.

High interest rates mean high mortgage payments; thus the property prices should decline as the buyers find it difficult to pay the high monthly instalments। But not in the short-term as most projects started over a year ago have been sold out. Other housing units in recently launched projects with high prices have also been mostly sold out. Builders will be wary of launching new projects with higher costs unless they have substantial local or foreign funds.

The first effects of this trend could be felt after three to six months as most property developers have the capacity to hold on to their new housing for the short term। Another factor is the two to three months taken for approval of home loans. The ones in the process may most likely continue after increasing the repayment period but new buyers will be careful before taking on higher mortgage payments every month. Thus the demand for housing should slacken and NRIs can move in.

If an NRI wants to buy a house in the metros, the prices are not going to ease off just yet। Property developers in the metros - Delhi, Mumbai, Chennai, Kolkata and Bangalore - have deep pockets and can maintain their high prices for over six months or longer. And they have overseas funds to develop new projects.

But the developers in Tier Two cities and towns will have to ease off earlier and lower their prices if they have to survive। Prices are expected to decline in the second half of this year in these cities and towns. The price decline in these Tier Two cities could be steeper than the metros.

Gulf NRIs stand to benefit the most। Most NRIs from the Gulf region usually want to buy a home for themselves and invest in real estate. Since their target towns fall in Tier Two or even smaller townships and villages, they stand to benefit the most from lower housing prices. Since metros have new companies opening offices and requiring housing for their executives, their prices will hold on for a while.

Now is the time for NRIs to wait and watch and reap the twin benefits of interest rate hike.