As widely expected, the Reserve Bank of India’s (RBI’s) Monetary Policy Committee (MPC) unanimously cut its benchmark repo rate (the rate at which the RBI lends to banks) by 25 basis points (bps) from 6% to 5.75%.
This is the third consecutive interest rate cut since February under RBI governor Shaktikanta Das, also head of the MPC, in the middle of an economic slowdown and rising uncertainty worldwide because of multiple factors. Experts, by the way, foresee more rate cuts in the coming months to further push economic growth.
As Das so succinctly put it, “In the past, the transmission took about 4-6 months. But, this time, it has happened in (a short span of about) 2-3 months. Going forward, we expect faster and higher transmission by banks.”
Two-way lane
For the common man, this rate cut can have a two-way impact. For depositors, their new deposits will earn lower rates. On the other hand, for borrowers, this fall in interest rate will bring down the interest one has to pay on loans. But, for floating-rate home loans, a new rate will come into effect from the ‘reset date’ of the loan.
Ramesh Nair, CEO & Country Head, JLL-India, shared his views with The Optimist on the RBI’s latest monetary policy. “According to the latest Government of India data, economic growth slowed down to a 20-quarter low of 5.8% during the last quarter of FY 2018-’19. Also, consumption has remained weak over the past several months due to the ongoing liquidity crisis, in spite of controlled inflation under 4%.
“These trends have propelled the RBI to reduce the repo rate for the third consecutive time this year to 5.75% from 6%. Even on the global front, such factors as trade tensions and an expected global economic slowdown had a bearing on the decision. The change in the policy stance to ‘accommodative’ is the much-needed measure to boost the economy.”
Nair added, “The decision to cut the policy rate is laudable. As the residential sector is already at inflexion point, signalling sustainable recovery, this decision will support the trend. This repo rate cut is likely to have a direct (positive) impact on the real estate sector, provided that the banks, in turn, transmit the same by a corresponding reduction in their lending rates. It has been observed that, despite a 50 bps reduction in repo rates by the RBI in the previous two reviews, the mortgage interest rate has remained sticky.
“As a result, the required benefit of the rate cut hasn’t reached home-buyers. However, with regulations reinstating home-buyers’ confidence in the segment, markets witnessed recovery in sales in 2018. Further, in the January-March quarter of 2019, sales grew by 28%, compared to that in the corresponding quarter in 2018. But commensurate transmission in interest rates will further boost the residential sales momentum in 2019.”
Centre’s new outlook
- As India moves towards an economic slump, the newly elected government focuses on pushing investments and reviving consumption demand and exports
- It will try to resolve liquidity issues in the financial sector to help the nation get back on a 7% plus growth path in the long term
NairSpeak
‘Stronger implementation and continuity of reforms under the second term of the current government will uplift homebuyers’ sentiment’
- Ramesh Nair, CEO & Country Head, JLL-India
Repo for dummies
- When the RBI cuts its lending rate, banks pass on this benefit to their customers
- And, when banks pass on the rate cut, consumers find home, auto and other loans cheaper
- This leads to a spending spree, thus boosting the economy
Direct benefit
- Rate cut to bring down EMIs of home and auto loans
- Relief for corporates as debt repayment burden lessens
- RBI decides to waive RTGS and NEFT charges to boost digital transactions
- A committee will look into ATM charges
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