Monday, February 12, 2007

CNBC TV18 interview on interest rates

Ajit Dayal of Quantum Advisors
Q: What are your thoughts on this whole interest rate inflation cycle and particularly on the financials, how are you translating that view?

A: Our view again is that interest rates will increase, we believe that the government ten year bond will be probably closer to 8.5-9%, inflation will be a lot worse than people expect and the government and the central bank will have to keep on raising interest rates.

The effect of that in our view will really be a lot on property prices, we have seen over the last two-three years a huge ramp up in property prices across the country. I can tell you what I am reading about floor or the property over the last couple of weeks is that there has been a 50% decline in property prices over the last one year in terms of bare land and suddenly people who were really confident that they are going to make tonnes of money on property development. Some of the largest developers in America like Toll Brothers are leaving money on the table, they have bought land, they have paid deposits but because there is no demand in the US, it is just walking away from it and they are letting their deposits go.

In a similar way, you could see with the interest rates increasing particularly home loan rates increasing. If prices go up and the cost of money goes up at the same time, you could see a slowing down in demand for residential property, for commercial property at a time when supply is increasing many folds.

Some of the numbers that we have heard in the month of December and January for forecast about what is going to happen, there was one number that I think Gaurav Dalmia gave me where he said that in Kolkata the new supply of property is something close to 12 million sq ft over the next two years. The actual demand in Kolkata in 2006 was about the one millions sq ft, so you have got 12 million of new supply and 1 million of actual usage over a last one year. That is a huge growth that is required on the demand side to absorb all that new capacity and he gave me such other numbers for the host of other places across India.

So with the cost of borrowing increasing, with prices of real estate finished products and on land increasing we believe that the demand side may slow down and there could be a very sharp decline actually in property, which will affect to some extent everything else, the guys who sell the air conditioners, the guys who sell the refrigerators and everyone was planning to sell things around all of that. But barring that one sector in the economy, they are very optimistic on India.

We believe that India can grow by 6.5% per annum for next five-seven years without a problem; we are not yet believers on the 8-10% at all because we believe that there is no infrastructure to support that kind of growth on a sustainable level. So we have been skeptical of that number of 8-10% but 6.5% number for India for India for the next five years twice the global average, fabulous managements, very good companies buy India, that is our view still.

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