Real estate stocks rose on Tuesday, thanks to a huge fall in international oil prices. At the end of trading, the BSE Realty index was up 7.35%.

The reasoning of investors is simple: Lower oil prices will reduce the fiscal deficit, ease pressure on inflation and therefore the pressure on the Reserve Bank of India to raise interest rates.

This optimism was reflected in bond yields, which fell to two-month lows.

A Mint study of the com panies that make up the BSE Realty, the Bombay Stock Exchange index comprising real estate stocks, shows that interest charges as a proportion of earnings before interest and tax (Ebit) rose sharply in the June quarter.

As the chart shows, interest charges as a percentage of Ebit had increased from 10.13% in the September 2007 quarter to 12.52% in the March 2008 quarter.

In the June 2008 quarter, however, there was a sudden jump in interest payments, as a result of which interest charges for these companies went up to 19.38% of Ebit.

Most economists do not believe that the central bank will be in a position to lower interest rates anytime soon, especially with the need to tackle inflation paramount among policy makers and with inflation, money supply and credit growth running well above targets.

Nor are interest rates the only issue with real estate companies.

As a research note from HSBC Securities and Capital Markets (India) Pvt. Ltd points out, "Property prices will likely have to come down--not just interest rates--to revive demand.

Many investors expect a tapering off of WPI (wholesale price index) inflation from 4Q FY09 to improve business conditions for developers.

We consider this to be premature.

Even in an optimistic scenario of 10% income growth and a 200bp (basis points) drop in mortgage rates, we estimate that property prices would need to fall approximately 17-21% to improve affordability." One basis point is onehundredth of a percentage point.