India’s Monetary Policy Committee has done it this time by 35 basis points — to support growth in the economy at a time when inflation remains in check. Addressing growth concerns assumes the “highest priority” at this juncture, the MPC said while maintaining an “accommodative” monetary policy stance.
Following Wednesday’s review, the repo rate stands reduced by 35 basis points to 5.4 percent, taking the total quantum of rate cuts in 2019 to 110 basis points. At current levels, the repo rate is at its lowest since 2010 and the rate cutting cycle has been the steepest since 2015-16, when Raghuram Rajan cut rates by 125 basis points.
From 6.50 percent in the December 2018 policy, the repo rate has now come down by 110 basis points. This is the first time such an unorthodox number of 35 basis points has been chosen. However, this is not something new.
Key highlights
- MPC cuts repo rate by 35 bps to 5.40 percent
- MPC maintains ‘accomodative’ monetary policy stance
- Four members of MPC voted for a 35 bps cut; 2 voted for a 25 bps cuts
- RBI cuts FY20 GDP growth forecast to 6.9 percent from 7.2 percent earlier RBI pegs H2 FY20 inflation at 3.5-3.7 percent
- RBI cuts risk weight for consumer credit from 125 percent to 100 percent, except for credit card receivables
- Exposure limit for single NBFC raised to 20 percent from 15 percent
- Bank lending to NBFCs for agri and SME loans eligible for priority sector classification
Reactions
Anuj Puri, Chairman – ANAROCK Property Consultants
The hard facts of declining consumption and a deepening economic slowdown in India are inescapable, and real estate has been severely impacted by them. To this gloomy backdrop, the RBI’s repo rate cut of 35 bps to 5.4% announced in the latest monetary policy is obviously welcome. This rate cut, the fourth consecutive cut since February 2019, is meant to boost consumer sentiments once commercial banks transmit the benefits to actual consumers.
For real estate, a rate cut of 35 bps is however insufficient to significantly improve buyer sentiment in the mid-income segment, which still has a staggering unsold inventory of 2.17 lakh units in the top seven cities. On the other hand, demand for affordable housing, which accounted for 2.40 lakh unsold units in these cities, may see improvement as this highly budget-sensitive segment already has the benefit of other incentives.
Even minor downward revisions in interest rates can and do make a difference in affordable housing. If banks transmit this reduction in the prime lending rate to consumers, budget housing demand may improve. Likewise, housing demand in tier 2 and tier 3 cities, where property prices are less prohibitive, may see an uptick.
However, this rate cut, even if adequately transmitted by banks, will not do much for mid-income housing in tier 1 cities where the main concern is unaffordable property prices and not interest rates.
Previous rate cuts in 2019 did prompt some banks to lower their home loan interest rates by a certain margin. The RBI is putting in concerted efforts to establish a mechanism for effective transfer of repo rate reductions to actual consumer lending rates. This fact by itself bodes well for future acceleration of consumer spending as it means that future repo rate cuts will be transmitted more proactively.
Ramesh Nair, CEO & Country Head, JLL India
In line with the general market sentiment, the cumulative 110 bps rate cut in the last four p olicy reviews favours the Indian economy. The rate cut of 35 bps delivered by the RBI is likely to bring in a balance between growth and inflation. Riding along the same track, the real estate sector too will gain momentum owing to favorable policy reforms. However, the growth shall also depend on whether there is a proportional transmission of rate cuts to the end consumer.
The rate cut has a direct bearing on the real estate sector considering that residential sales rely to a large extent on the availability of credit in the form of home loans and buyer sentiment. The improved market sentiments due to the tax deduction schemes, modified tenancy laws, focus on implementation of PMAY, investment in infrastructure announced in the Union Budget 2019-20 coupled with interest rate deductions is likely to boost sales in the residential segment. Moreover, credit re-structuring measures such as the introduction of repo-linked loans by select banks will positively impact the homebuyers’ purchase decisions while ensuring enhanced transparency.
The decision to cut down rates was expected owing to the ongoing liquidity crisis and muted economic growth. This said, the RBI has taken the cue from the government’s Union Budget 2019-20, where it gave elbow room for fiscal stimulus to NBFCs. Additionally, the global slowdown followed by the US Fed lowering its rate provided yet another indication to the Central Bank.
The real estate sector has already registered a 22% Y-o-Y growth in sales in the first six months of 2019 as compared to the corresponding period of last year. Stable real estate prices combined with steadily rising incomes have further uplifted the homebuyers’ sentiments in the last few quarters. However, the growth trajectory of the real estate sector ultimately depends on the successive transmission of rate cuts to the end consumers.
Source: bloombergquint