Well, I apologize to my readers about the delay in the budget post. I am still in the process of analyzing it and expect my first part of analysis to be out within the next 3 days. However, I read something interesting on real estate which I intend to share.
There was an interesting article on foreign debt or ECBs into the sector. Now, real estate sector is not allowed to use ECBs by the Indian government. When I tried analyzing the reason, I observed that this happened in 2007 when the economy started overheating. It was felt that if ECBs are allowed a real estate bubble could open up. Now, a burst could cause the economy to come down. Hence, a timely intervention was done to avoid this burst. I intend to discuss the real estate burst phenomenon in one of the later posts.
But interestingly, ECBs are still flowing into the sector. The mechanism is an interesting one. The Real estate company issues the bonds which are bought by NBFCs. These bonds are then listed in the stock exchange. Hence, the local finance firms act like a storage place to such bonds, and when they get the right price, they sell it to a foreign fund. All transactions done and quite legally too.
Now, in my opinion, this becomes a cause of worry. Already, the FM has realized the overheating of the economy due to which the CRR rate has been hiked and fiscal stimulus being withdrawn. With such funds being infused, we run the risk of inflation and excess liquidity. Hence, the government needs to step in and plug this loophole. One possible way could be to prevent the listing of such bonds. FIIs can only invest as long as the bonds are listed in Stock Exchanges. If we could prevent them from being listed, we could actually control the ECBs into the sector.
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