In an unexpected move, RBI has recently scrapped currency notes of Rs 500 and Rs 1000 and announced the replacement of a new set of currency notes. These notes are being exchanged from banks and post offices across India. One can deposit such notes freely in oneâ€™s bank account.
While the move caught everyone off guard, this has wide future implications for the economy, buying behavior, inflation and a host of other factors, even political finances.
The move is going to suck out about 14 lakh crore worth currency notes from the system which amounts to about 86% of the money in circulation, in value terms.
Subsequent restrictions on cash withdrawals are in place. And tallying deposits more than Rs 2.5 lakh in bank accounts with declared income in IT returns is indicated.
It is estimated that a significant percentage of this huge amount is unaccounted and therefore will not come to the banking system. However, no one knows the exact amount yet. The fake currency in circulation will be wiped out.
Real estate sector has been seeing some green shoots as regards the off-take of new and resale properties of late. This has been reducing the inventory pile up in the sector as well as providing working capital to the developers.
With the recent RBI decision, the situation got deeply disrupted.
Inflation Is Likely to Cool Down in the Short Term.
Inflation has been rearing its ugly head on the lower base index; it has been quite visible on food articles.
With such huge amounts of cash, especially black money, removed from the system, inflation is expected to cool down.
The government will also have the room to finance its budget deficit and other investment programs as it is expected to mop up about Rs 3 lakh crore. The borrowing cost of the central government will come down.
RBI Will Find It Conducive to Reduce Interest Rates, Probably As Early As 3 to 6 Months.
India can also expect short-term deflation as total currency in circulation goes down.
Eventually, banks will increase lending as they have to adhere to the rules governing CRR (Cash Reserve Ratio) and with more CASA deposits they can increase lending.
As we do not know the extent of black money which will not return to banks, we cannot predict the extent of deflation or inflation.
Real Estate Sector is Looking at Long-term Fundamental Change.
The effect of the transformation will impact real estate sector in a variety of ways.
Real estate sector will have to adjust to the paradigm shift with more transparency, as the sector is much unorganized and has the reputation of being a safe haven for black money.
The new home market is going to be impacted somewhat, but the secondary sales market is going to be primarily affected.
Land prices are expected to head downwards, as black money-induced price rise will be controlled.
In the short term, though, uncertainties will remain.
But the inevitable lower prices and transparent financing along with lower interest rates and credit growth will create favorable and sustainable conditions for the sector.
How Should You Respond, If You Consider Buying Property in Kolkata Now?
Kolkata property market, unlike NCR or MMR (Delhi and Mumbai) markets, is not investor driven and because of other factors too, did not witness any runaway price rise. Kolkata is largely an end-user driven market.
Therefore it is expected that the fall of property prices in Kolkata will not be major, if at all.
We believe that Kolkata market will give a window of opportunity if you want to buy property in the short term.
Although nobody knows when the market will bottom out and you should not try to catch a falling knife, so to speak.
Kolkata property prices are going to stabilize soon; buying property in Kolkata will be far easier for reduced interest rate and better credit availability.
However, you should be cautious about choosing the right property and the right developer. You must check whether the developer can have any liquidity crunch so that the possession of the property is delayed.
You must do the extra bit of research to identify a developer with a good track record. You should take the help of property advisors and knowledgeable sources.