For last few years India has seen a rapid rise in real estate and stock prices .The prime driver of this rise has been soft interest regime. Lending by Banks for property purchases has been up by almost 50% year on year for last two years which fuelled property prices and let to property boom. The lower interest rate regime also ensured that liquidity was channeled into stock market .This along with FII inflow ensured a rising stock market with almost a secular rally. GDP growth has touched 9.2% highest in last two decades.
But now look at the other side. Inflation has touched almost a decade high of 6.8% . Such high inflation rate is sure to unsettle any government.Current account balance has turned negative and is widening indicating a demand pull .
RBI has done it’s bit by raising the interest rates and CRR .These measures will ensure that the system has right liquidity and the economy does not overheat.
The measures will soon have an impact . Property prices should now stabilize and reduce. The relentless lending by banks should now hopefully be reduced . Stock markets have seen highs all over the world , not just in India. The fundamental drivers for rise in the stock market in India is the FII and domestic inflows . If one watches the stockmarket movement it is evident that excess liquidity has played a very crucial role in the rise .Now with the measures taken by RBI hopefully the stock market will see some stability with a downward bias .In fact the sentiments in the stock market have been quite negative ever since CRR rate hike was announced .I expect this to continue.
Property prices work the same way as stock prices .What has happened in last few years is the buildup in property prices due to anticipation of a further price rise and a huge demand. Many people have bought houses just for investments sake. This may not materialize now due to higher interest rate and reduction in lending by banks for property.
