New Delhi: In its second bimonthly monetary policy review, the monetary policy committee (MPC) decided to increase the repo rate by 25 basis point to 6.25 per cent. Notably, this is for the first time in four and a half years that the Indian central bank has increased the rate at which it infuses liquidity in the banking system.
The reverse repo has been adjusted to 6 per cent from 5.75 per cent. The hike in the rates by MPC came against the backdrop of rising inflation, higher oil prices and weaker currency. Notably, all the six members of the MPC voted for the hike of 25 basis points in the rates.
The central bank has also allowed banks to use 2 per cent more SLR (statutory liquidity ration) carve out to meet liquidity coverage ratio. With this now bank use SLR carve out of 13 per cent.
The MPC kept its policy stance at ‘neutral’ which gives it flexibility to move in either direction. In a statement, the committee said, “The decision of the MPC is consistent with the neutral stance of monetary policy in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 percent within a band of +/- 2 percent, while supporting growth.”
Urjit Patel, Governor, Reserve Bank of India said that neutral stance leaves all options open. He further said that the MPC felt that there was enough uncertainty to stick to neutral stance and yet respond to the risks of inflation target that have emerged in the recent months.
The committee headed by RBI Governor expects that the retail inflation will be 4.8-4.9 per cent in the first half and 4.7 per cent in the second half of the year, whereas the GDP growth for 2018-2019 has been retained at 7.4 per cent as it was in policy review in April.
As per the statement of RBI, “While the summer momentum in vegetable prices was weaker than the usual pattern, there was an abrupt acceleration in CPI inflation excluding food and fuel.” Increase in oil prices have added to it.
RBI said, “The MPC notes that domestic economic activity has exhibited sustained revival in recent quarters and the output gap has almost closed. Investment activity, in particular, is recovering well and could receive a further boost from swift resolution of distressed sectors of the economy under the Insolvency and Bankruptcy Code.”
The next meeting of the MPC is scheduled to be on July 31 and August 1.
Industry Speaks on Hike in Rates
Anshuman Magazine, Chairman, India and South East Asia, CBRE says, “For the first time since January 2014, the repo rate and reverse repo rate were raised by 25 bps to reach 6.25% and 6% respectively. The hike comes amidst a scenario of healthy economic growth, high crude oil prices and rising inflation. Most of the banks had already started to increase their lending rates prior to the policy announcement, and are expected to do so even more. The decision of Reserve Bank resonates with its neutral stance of monetary policy, while reiterating its commitment to keeping inflation in the medium-term at 4% (within a band of +/- 2%), and at the same time support economic growth.”
Ramesh Nair, CEO & Country Head, JLL India says, “The RBIs decision to increase repo rates by 25 bps to 6.25% after 4 years speaks of a carefully deliberated decision in light of the recent inflationary pressure on the economy.”
He further adds, “With inflation in April ’18 close to 4.25%, this decision comes as RBI looks to keep inflation under check in light of the US Fed reserve also announcing an expected hike. The decision was highly expected but will be very critical as the government enters into the election year.”
Talking about the market sentiments he said, “The hike may seem to dampen sentiments in the market but in terms of real estate may have little or no impact. As almost all home loans these days are on floating rates, the rise and fall in home loan rates does not impact the performance of residential real estate sector much and tends to balance each other out over long term.”
“As buying decisions are generally not taken based on fluctuations in home loan rates, there will be very little effect on the real estate market. Though for some home buyers looking towards making a very low ticket size purchase decision, there may be some tentativeness in the decision making, overall we will see minimal impact on the end-user in the housing sector,” he adds.
Deepak Kapoor, President CREDAI-Western U.P. & Director, Gulshan Homz is of the view that increase in the rates is a clear indication that the apex bank wants to have an aggressive approach in the upcoming two months. A sufficient cushion needs to be kept for the economy as the start of the financial year had been stable and more liquidity is expected to flood the market with REITs and InvITs expected to be operational soon. With no respite in inflation, the Reserve Bank was left with no option but to increase the key rates in order to have a tighter grip over the economy.
Manoj Gaur, Vice President CREDAI-National & MD, Gaurs Group says, “Against popular belief, the RBI has chosen to increase the key rates by 25 basis points. This would now bring another wave in the market where the sentiments will be low for quite some time. The start of the financial year had been smooth and some incentives now could have become a big sentiment driver for the entire economy. However, we expect that the markets would have settled down before the next policy review and give the apex bank a chance to rethink over this increase.”
Dhiraj Jain, Director, Mahagun Group says, “Looking at the market dynamics, we were projecting the RBI to maintain the status quo. Any increase in lending rate dampens the sentiments in real estate as the net cost on the buyer for the housing unit gets increased but with the market inflation not coming below the medium – term target and potential trade wars among more advanced economies of the world, the apex bank would have been compelled to take this step.”
Vikas Bhasin, CMD, Saya Group feels that despite the hike there is a room for the financial institutions to cut down the rates. He says, “Even though the apex bank has increased the rates, but we still believe that there is room for financial institutions to cut down on their lending rates for their customers. Prior to this, the last reduction was a 25 basis point cut in the key rates in the month of August 2017, the benefits of which are yet to be fully passed on to the customers. With already two months done in the financial year and markets behaving normally, the Reserve Bank could have proactively thought over another rate cut which would have definitely put added pressure on banks to reduce their lending rates.”
Gaurav Gupta, General Secretary CREDAI – Ghaziabad & Director, SG Estates, says, “The reduction in rates would have ultimately been advantageous to the customers for the reason that if banks have reduced rates, the same will apply to the end-borrowers too and real estate market will have a pool of demand to deal with. A rate cut of 25 bps could have helped ease the pressure off the market which has been balancing itself for over 6 months now. However, with an increase in the key rates this monetary policy review, we expect the market to run with only a static demand in the short run, that too on the lower side.”
Dhruv Agarwala, Group CEO, Proptiger.com, Housing.com & Makaan.com says, “The decision by the RBI on increasing the key rates can be seen as an aggressive stance keeping in mind the medium – term target for CPI Inflation of 4 percent, while still aiding growth. A change in the key rates on either side would have affected the economy both in the short and long run. With the rates now going up, markets are expected to dip slightly but with the stability it has achieved in the past, it is expected to recover from the slump eventually. Added to that, the uncertainties and volatility in the global markets have added to the list of reasons for the apex bank to take this approach.”