In a surprise move, the Reserve Bank of India on Tuesday slashed the repo rate by 50 basis point(at which the central bank lends to commericial banks). The stock markets cheered the RBI announcement and closed 162 points up with rate sensitve stocks registered an impressive performance.
The impact of repo cut and other developmental and regulatory measures will be incrementally positive for banking and economy and will be seen in short to medium term period, Soumya Kanti Ghosh, chief economic adviser & GM, economic research department, SBI said.
We take a look at how the Central Bank rate cut will impact the economy
1. Infrastructure investment to get a push: While announcing the 50 basis points rate cut, RBI Governor Raghuram Rajan was eyeing a pick-up in investments. He said “Investment is likely to respond more strongly if there is more certainty about the extent of monetary stimulus in the pipeline, even if transmission is slow.” Infrastructure projects have been on a slow track for a variety of reasons and over the last couple of years there has been a sharp decline in institutional funding, led both by a decline in demand and banks unwilling to increase their exposure to the sector. Experts say that a rise in non-performing assets (NPAs) within the sector, high number of stalled projects and weak financial ability of players led to this decline in loan take-off and thereby a dip in investments. Kuljit Singh, partner and industry leader, infrastructure, Ernst and Young said that a cut in rates will improve the return on equity for companies. “If the debt funding of a project is 70 per cent, then a 25-30 basis point cut would lift the equity return by 0.6-0.7 percentage points, which is a good increase in return,” said Singh.
2. Home loans and corportae loans to be cheaper: Home and corporate loans will cost less after the apex bank lowered the key interest rate by 0.50 per cent –the biggest cut in over three years — to bolster the economy. It will help the conumser both in borrowings and investment. Most of the banks and housing finance companies will look to bring the rates down in the coming days to avoid losing customers. With the rate cut, both the new and existing customers will gain. The new customers will enjoy the benefit of rate cut as the banks will pass on the rate cut benefit to them anyway. For existing customers, if the bank had initially raised tenure when the rates were going up, the customer will first see the reduction in tenure and then later when the rates will go down, there will be a cut in the EMIs. For an existing customers the benefits will not be in the same proportion as the new customers.
“RBI has given a positive surprise to markets, by cutting repo rate by 50 basis points, as against expectations of 25 basis points cut. Overall, we continue to expect a downward bias in interest rates in India, which should act as one of the catalysts for investment revival, going hand in hand with favourable government measures,” said Dinesh Thakkar, CMD, Angel Broking.
3. Housing sector will get a boost: The Reserve Bank of India proposed to lower the minimum risk weight on housing loans from the current 50 per cent. This will enable the banks to free more funds to lend for affordable housing. “With a view to improve affordability of low-cost housing for economically weaker sections and low income groups and giving a fillip to Housing for All, while being cognizant of prudential concerns, it is proposed to reduce the risk weights applicable to lower value but well collateralised individual housing loans,” the RBI said. JLL india Chairman and Country Head Anuj Puri said 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”.
4. Realty sector: The realty sector hailed the RBI move to cut interest rate by 0.50 per cent and developers have asked the banks to pass on the benefits to home loan borrowers that would help revive housing demand especially during upcoming festive season. “Festivals assume a tremendous significance in India and the occasions which are one of the most preferred days for buying property for Indian families. This festive season will begin with Navratri soon followed by Dussehra and Diwali. With the rate cut, we are expecting a change in market sentiments benefiting the large number of home buyers and various stakeholders of the real estate,” Shailesh Puranik, MD, Puranik Builders said.
5. Auto sector: The rate cut will help auto sector meet 15-20 per cent sales growth in the festive season as 65 per cent of car sales are financed. A reduction in interest rates will reduce cost of ownership and help the automakers get more customers. “Rajan surprised the market with a deeper than expected rate cut. This cut comes as a balm for anxious markets and I see the relieved celebration in the equity and fixed income markets. This pre- Dusshera / Diwali gift will lift the festive demand as banks will hopefully start reducing the cost of consumer loans. The industry’s expectation of a turnaround in demand led growth in the second half will now be well anchored, ” V S Parthasarathy, group CFO, Mahindra & Mahindra Ltd said.
With inputs from agencies and Indian Express’ Sandeep Singh
