RBI today cut the benchmark repo rate by 50 basis points to a 4-1/2-year low of 6.75 per cent in a surprise move
“As opposed to the market’s expectation of a 25 basis points cut, the RBI has delivered an astounding 50 basis points reduction. With this, it has clearly abandoned its cautious baby-steps approach and assumed a bolder stance, obviously because the current economic fundamentals provide it with the room to do so. Given the magnitude of this step, I do not think any further rate cuts are likely in this financial year, especially since the RBI foresees a moderate growth in inflation rate in the interim months. For the affordable housing sector, the outlook is nevertheless bright, since the RBI governor has made provisions for lending to this sector to become less stringent and broader in scope.” Says
Anuj Puri, Chairman & Country Head, JLL India
The repo rate cut decision came in for praise by policymakers, including Finance Minister Arun Jaitley, who said that that transmission of RBI rate cuts by banks will boost investments.
This rate cut is rooted in RBI’S confidence on inflation side, particularly imported inflation that’s falling due to collapse in global commodity prices. Even food inflation remains contained. RBI has lowered its January 2016 inflation projection to 5.8% from 6% and March 2017 target to 5%. Although revision is marginal, this underscores RBI’S confidence in inflation stability.
Growth forecast has been revised down to 7.4% from 7.6% for FY16. Reasons for growth slowdown are poor monsoons and slow pick up in investment cycle.
Falling inflation and slowing growth have made RBI front end it’s rate cuts to kick start domestic consumption and investment demand. RBI has reiterated it’s earlier stance of working with governemnt and banks to transmit these cuts to real economy through the bank transmission channels. We think RBI will unlikely cut rates soon. As these lower rates are tansmited by banks, th is may be a great time to refinance loans.
RBI has proposed to lower risk weights on individual housing loans in the affordable segment (currently minimum risk weights in housing loans is 50%) to boost low cost housing. This will help in meeting govt’s target ‘Housing for all’ by 2022. Along with rate cuts, this means housing loan market should see a pick up in volumes. Home loan and Car loan rates should fall by .50 basis points & Should to come at 9%.
Dr Rajan said the 50-basis-point repo rate cut should not be viewed as an aggressive move. Many conditions laid down by the RBI in the previous policy announcement in August have been met, paving way for a sharper rate cut, he added.
At the outset, this rate cut will lead to a long and sustained improvement of the market sentiments through higher consumer spending and easy availability of loans to both consumer as well corporate. This is great news for the real estate sector as the rate cut would also lead to a significant reduction in home loan rates thereby reducing EMIs of home buyers. Corporate would benefit as interest outgo on existing loans would reduce and also enable them to raise equity. The prospects of Government divestment would also gather pace. The green signal to raising of Rupee Debt overseas is a game-changer and can create an alternate source of funding for Indian companies.” says Puraskar Thadani, Editor; Property For Sale Magazine.
©Property For Sale Magazine / 2015 / Vol. 6 Issue. 6 / Monthly