Focus on Risk Management

Te Reserve Bank of India’s (RBI) Second Quarter Review of Monetary Policy 2010-11 was largely on expected lines. The hikes in policy rates by 25 basis points on both absorption and injection modes that were announced had already been discounted by the market. By and large, the anti-inflationary stance of policy still continues, though some indication has been given that the rates may not be raised further for about three months. Given the inflationary pressures and the medium-term goal of containing inflation to below 4%, one or two more rounds of rate hikes are very likely before a neutral level is reached.

One aspect of the policy that has received considerable attention is the announcement of prudential measures on housing finance. High growth, urbanisation, the expansion of the middle class, and the availability of finance have resulted in an acceleration of housing prices in major urban centres, with a spillover into smaller towns as well. While dwelling units are badly n eeded by the growing population, the increase in home prices in a short span has made housing unaffordable to large numbers of the urban population. It is not demand alone that is driving up prices. Speculative forces combined with high liquidity, including of black money, have also contributed to skyrocketing prices. As a result, floor prices are several times higher than construction costs.