Hikes to prick realty bubble may boomerang: RBI

Ahead of its quarterly policy review on October 31, Reserve Bank of India (RBI) has expressed doubts on the efficacy of "pre-emptive" raising of interest rates to prick the housing bubble.

"There is a need to carefully evaluate consequences of monetary policy actions, specially when the housing market is seized by price bubbles. Raising interest rates more than what is required for overall price stability may prove to be counter-productive," the central bank said today.

Such a policy could also be potentially damaging for other sectors in the economy, the central bank said in a chapter on "Identifying Asset Price Bubbles in the Housing Market in India-Preliminary Evidence" posted on the website under "Occasional Papers".

The papers have been issued at a time when several commercial banks have expressed the view that there should not be any further hike in short term rates to contain inflation, which has crossed the 5% mark.

Bankers argue that with oil prices falling and seasonal factors tappering off, the Reserve Bank should not hike rates as it may impede the high growth momentum.

The RBI study said direct measures taken for demand compression may be less worthwhile than sectoral measures such as withdrawing or reducing regulatory accommodation. As a pre-emptive measure, the RBI, in its annual policy statement for the current fiscal, had increased general provisioning for residential housing loans beyond Rs 20 lakh and commercial real estate from 0.40% to 1%.