Repo rate cuts alone won't lift economy: Industry backs RBI's status quo

The RBI decision to keep the repo rates unchanged has come as a surprise, if not shocking, to many, especially in the real estate and automobile sectors. The sectors were expecting that the slump economic growth would take precedence in RBI's policy decision. However, with the apex bank leaving the repo rate untouched from that of October, many are left disappointed.

Many feel that lower interest rates would have helped the automotive and real estate segments—two most impacted sectors—which have been ailing for some time. “Lower interest rate would have helped push up credit demand and investment in the economy, aiding (the) overall economic growth. It would have provided the much required reprieve to some ailing sectors like real estate and automobile. RBI has probably taken the cautious approach of wait and watch to see the effect of past rate cuts and also to assess the inflation trajectory. With economic growth remaining subdued, there are still chances of a rate cut in the next meeting,” said Shishir Baijal, Chairman and Managing Director, Knight Frank India, a firm that tracks the real estate segment in India.

From a real estate point of view, rate cuts were expected because the move could have boosted overall economic sentiments. “The expected rate cut of 25 bps would have caused home loan values to fall below 8 per cent for the first time ever,” said Anuj Puri, Chairman – ANAROCK Property Consultants.

That said, he also feels that a rate cut alone would have not brought in a revival of the real estate sector. “However, another rate cut alone would have been insufficient to stir housing sales significantly across budget categories. The previous rate cuts throughout 2019 had almost no perceptible impact on residential sales. In fact, back in 2014, even when the home loan rates were high in two digits at 10.3 per cent, housing sales remained at peak levels. In the present scenario, only the combined effect of lower interest rates coupled with other measures such as a cut in personal taxes, reportedly being considered by the finance minister can actually stimulate residential sales out of their current lethargy.”

Others are in agreement saying rate cuts alone would not help to improve market sentiments. Market requires further fiscal stimulus to drive growth and hence, the central bank should also focus on bringing in other structural changes. “RBI needs to address other structural issues in the banking sector to help the small and medium enterprises (SME)s as they are important growth and employment generation engine for the economy. Overall, NBFC-lending to SMEs is not growing on expected lines. Credit flow to NBFC's has reduced and the cost has increased which has made things difficult for SMEs,” said Ritesh Jain, co-founder of FlexiLoans.com, a digital lending platform.

“Real estate sector is one of the few sectors which have the potential to kick-start a sluggish economy. Going forward, we request the government to take necessary steps to create housing demand across segments. We look forward to the government’s constant support to help bring the real estate industry back to global forefront. We hope to see a positive upturn in the real sector soon,” said Surendra Hiranandani, chairman and managing director, House of Hiranandani.

There is also a predominant view in the industry that despite the reduction in repo rates by the RBI in its previous reviews, it did not have any significant impact on the lending rates by banks. Currently, it is important for banks to reduce their lending rates and ensure that the home loan borrowers reap the benefits of this move. “While the RBI has done its bit in the recent past, it is now critical that banks facilitate a faster transmission of these rate cuts to ensure that the measures reap results, thus strengthening private consumption and spurring further investments. Moreover, with the RBI lowering its GDP growth forecast to 5 per cent, this would directly impact banks, ensuring that credit flow increases to the NBFCs. However, economic revival may not happen only due to monetary policy tool and the government may have to pitch in with further fiscal stimulus to revive growth in the economy and real estate sector in particular,” said Abhishek Jain, joint managing director of Terapact, a strategic sales and marketing firm.

By keeping the rates unchanged, the RBI has recognised that the need of the hour is to infuse confidence about economic growth through a holistic approach and will come by combining fiscal and monetary measures. Many feel that the decision to maintain policy rates may augur well for the economy as the recently introduced policy reforms will take time to pan out and materialise. The economy needs to absorb the impact of the recently introduced reforms and the previous rate cuts.

“With the inflation already crossing the 4 per cent mark and expected to remain elevated for a few quarters, further rate cuts would have posed an upside risk. In light of the recently announced reforms doled out by the government, the real estate sector is expected to register higher growth in times to come. Measures brought so far are likely to show their impact. With corporate tax cuts and the creation of a fund for stressed projects, the government should explore the options of increasing the money supply in the economy. That would not only encourage consumer spending but also stimulate investment flows and higher credit flow which has come down over the quarters,” observed Ramesh Nair, CEO and country head, India, JLL.

The retail inflation, indicated by the consumer price index, which has shot up to 4.62 per cent in October, well above the RBI target ceiling of 4 per cent, is another case in point. The RBI should be targeting inflation through its monetary policy and since there is an increase in inflation expectation, the status quo is seen as the right decision. “This would require caution. But the component that has affected the price level is the prices of fruits and vegetables. This is considered a seasonal factor and its impact may wane off over the next one or two months. But it is a bit worrisome that the prices of fruits and vegetables are continuing to remain elevated and in some cases it is too high that it may not come down too soon. This would mean that the impact on CPI may be longer than expected,” remarked Joseph Thomas, head of research—Emkay Wealth Management.

He also noted that the rupee is weaker today than it was three months ago and a weaker rupee is akin to lower interest rates. “Since the rupee is expected to be weaker from here, a cut may not be the best thing to do at this juncture since effective lower rate is already established with a weaker rupee. Besides this, the liquidity in the inter bank market and the systemic liquidity is in surplus and there is sufficient liquidity to see the auctions go through smoothly. The liquidity conditions ensure that rates, especially at the short end of the curve, remain low. This is what is actually achieved by a repo rate cut, too. Therefore, a cut was not required at this juncture,” added Thomas.