RBI reduces rates - Lifeline for developers?

On Saturday, November 1st, RBI slashed CRR by 100bp and repo rate by 50bp. Will it help the developers or buyers? Lets examine this.

Real estate developers are struggling with a number of factors such as low demand, high interest rates and credit crunch. RBI's recent move to lower CRR and Repo rate may inject more than Rs. 60,000 crores in the market. But this may not percolate into a lower interest rates either for buyer or corporate. This is because of "risk aversion" attitude adopted by the banks. The yeild spread (difference between govt bond and AAA corporate bonds rating) is around 400bp, which is extremely high. This shows that banks are still wary of lending to corporates. Situation is worse for real estate companies which do not come under AAA rating. For example DLF's credit rating is AA, Omaxe's is A- whil other developers'ratings are BBB or less. This put them in extremely risky category pushing corporate borrowing rates of moe than 16%. Developers such as Unitech, HDIL, Omaxe, Orbit Corporation and Sobha Developers have borrowed aggressively in the last three years to support their ambitious expansion plans. Now they are facing a slowdown in the demand for the properties, which would serioussly affect their cash flows in the coming month. They are now over-leveraged; thus have limited option to raise debt.

So unless the risks aversion reduces, I see little chances of interest rates or corporate borrowing rates to come down. Moreover, banks have not decided on the lending rates yet. So RBI's recent move may or may not lower housing loans.