According to experts, building materials such as cement may increase when oil prices rise. There is also a chance that interest rates would increase if the RBI shifts its accommodating posture to combat inflation.
Experts warned on Friday, February 25, that the unfolding conflict could spell a potential crisis for India’s real estate sector after Russia launched an all-out invasion of Ukraine by land, air, and sea, and the US and Europe promised to retaliate against Moscow with the harshest sanctions possible. According to them, the impact would be seen in the form of a rise in the cost of building materials, especially cement, due to increased crude oil prices and a likely increase in financing rates.
According to experts, in the case of a full-fledged conflict, the cost of transportation will most certainly rise, with the effect cascading across the supply chain. This may cause raw material costs to increase, raising the construction cost even more.
And, to slow increasing inflation, the Reserve Bank of India (RBI) may adjust its accommodating posture, which would impact house loan interest rates.
Oil prices have already surpassed $100 per barrel, and stock markets worldwide have fallen. Oil prices have risen in recent months due to fears about interruptions in the global supply chain caused by the escalating Ukrainian situation.
Indian cement manufacturers, who are already under pressure from rising raw material and energy costs, will feel the impact.
The impact will eventually filter down into the real estate business. While the sector has remained robust, a 20-30% increase in raw material prices has somewhat led developers to raise project pricing. According to industry projections, prices would climb significantly higher in the next quarter, and given the current situation, the increase might be massive.
Economists agreed with the assessment: if the Ukraine issue worsens, it might negatively influence the broader economy and the real estate industry, which is now growing. With oil prices approaching $100 per barrel, there may impact the whole economy regarding manufacturing and supply chain costs. As a result, the price of real estate factor inputs is anticipated to rise, leaving real estate developers, who are already working on razor-thin margins, with no choice but to raise prices (supply-side). On the demand side, the RBI may have to adjust its attitude due to inflationary pressures on the Indian economy, leading to a future rise in the policy rate (repo rate). If this occurs, mortgage rates are likely to rise gradually.
The impact will be felt on both the demand and supply sides, which does not bode well for the real estate industry. Others believe that, while the current escalation of global tensions may inflame crude oil prices, keeping inflation rising in the coming months, members of the RBI’s Monetary Policy Committee (MPC) are unlikely to opt to forgo growth to reduce price pressure. Given the dovish tone of the MPC minutes, they continue to forecast the status quo in April 2022. However, policy normalisation may need to begin after that, with a shift to neutral in June 2022.