What Happens To Indian Real Estate When US Fed's Interest Rates Rise?

The US Federal Reserve on Wednesday raised interest rates by 25 basis points for the first time in 2016, while also forecasting slightly faster increases the next few years amid the prospect of a massive US government stimulus.

"All the (Federal Open Market Committee) participants recognise that there is considerable uncertainty about how economic policies may change and what effect they may have on the economy," Fed Chair Janel Yellen said, referring to changes new President Donald Trump is likely to implement.

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How does a rate hike by the Federal Reserve affect real estate in India?

• Real estate developers are different from companies, which are export-oriented. Exporters are likely to become wealthier when the value of the dollar rises, because they are paid in that currency. But, the revenues of developers of property in India are in Indian currency, the rupee. But, if they have debt that they owe in the US dollar, their debt would rise, as the value of the Indian currency will fall relative to the US dollar. When the dollar becomes strong, their debt would become more of a burden.

• If the US Fed raises interest rates, it might lead to a tightening of money supply across the world. The Reserve Bank of India (RBI) might hike rates, too, and this might raise the cost of borrowing for Indian home buyers and real estate developers. 

• A sharp interest rates rise by the Fed pushes a decline in new launches, and spending on residential property. 

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• However, when the rupee depreciates against the dollar, non-resident Indians (NRIs) would be more interested in investing in markets here. This is because investing in Indian real estate would become cheaper. This is especially true, if they buy ready-to-move-in properties in India. But, if they invest in under-construction properties in India, they are likely to gain from a strengthening dollar, but only if it remains strong. Their gains from investing in Indian real estate would also decline, if the dollar weakens while they make the payment in installments.

• Home buyers, who invest in real estate in India, would benefit from the interest rate hike, if they convert their money from the US dollar to the rupee after the Fed hikes interest rates.

Also read: Fed Rate Hike Has Put RBI In A Tight Spot