RBI announces repo rate cut of 25 bps

Words: Anuj Puri, Chairman & Country Head, JLL India

 

The RBI has announced a cut on the Repo Rate of 25 basis points, which is very much in line with market expectations. There was a narrow fiscal deficit during FY2016, and the recent Union Budget targeted a further narrowing of fiscal deficit for the current fiscal year to 3.5% of the GDP.

 

When fiscal deficit is high, there is increased pressure on the Government to borrow more from the market, resulting in upward pressure on interest rates. However, that will likely not be the case this year. In the recent budget statement, the Finance Minister slashed interest rates by 40-130 bps on various small savings schemes. When deposit rates are low, there is room for lending rates to come down without hurting banks’ net interest margin. This is a big plus in the current scenario where despite a 125 bps cut in the recent past, banks were reluctant to pass the benefit to end-users.

 

The latest inflation data for the month of February showed a steeper-than-expected slowdown in inflation to 5.18%. Also, food and oil prices have shown signs of remaining largely stable, giving hopes that there is no major risk to inflation in the coming months. RBI anticipates the rate to hover around a comfortable 5.0% mark during the financial year.

 

Given this macroeconomic scenario, almost all polls of economists conducted by major Indian media houses unanimously suggested a cut of at least 25 bps, with few economists even expecting a bolder 50 bps cut.

 

Implications for the real estate sector

 

Real estate, along with automobile and banking, is an interest rate sensitive sector, and definitely benefits from interest rate reductions. While on one hand, developers are doing all they can to ensure that homes become more affordable to a larger set of buyers, small steps towards rate cuts by RBI will help banks to attract genuine end-user home buyers. Given that the inflation projection for the near term is also favourable, buyers can rest assured that rates are not going to rise in the near to medium term. On the contrary, they can expect few more rounds of rate cuts going forward, given that there are no untoward macroeconomic shocks expected.

 

The past few months have worked well for real estate sector. A lot of positive news came during this period:

 

  1. Taxation related clarity on REITs paved the way for a new investment cycle
  2. The Real Estate Regulatory Bill, which will help transparency in the sector to rise in the near-to-medium term, was passed.
  3. The recent press note on FDI released by the DIPP clears the air around ecommerce and Retail, thereby helping brick-and-mortar retailers to come on a level playing field with ecommerce giants.
  4. Tax incentives announced in the budget for affordable housing

 

Also, with the mechanism of determining lending interest rate switching towards MCLR (as enforced by RBI), banks can now be more adept in passing on rate cut benefits to borrowers, while also giving some clarity on the future course of interest rate movements – both of which will help borrowers to plan their EMI outgoings. This is definitely a good move towards greater financial transparency within the banking industry, and for home loan customers.