The RBI downplayed inflation risks while unequivocally mentioning that growth impulses have weakened significantly and output gap has widened.
Dubai - The decision will encourage more investment, especially in real estate in India.
Prime Minister Narendra Modi has vowed to bring in reforms to India that will bolster future growth and development, and this was affirmed on Thursday as the Reserve Bank of India (RBI) cut its key interest rate by a quarter of a percentage point to 5.75 per cent from 6 per cent with immediate effect to fortify the economy. The interest rate is what the RBI charges on lending to commercial banks.
In its bi-monthly review of the economy released on Thursday, the central bank also decided to change the stance of its monetary policy from neutral to accommodative. It noted that inflation remains below its target, even after earlier rate cuts. It also expressed concern over a sharp slowdown in consumer demand and investment. Lower interest rates help make credit cheaper for borrowers, though they can also spur inflation.
"The repo rate cut by 25bps will give the new Modi 2.0 government some boost in credit growth. Markets have not reacted positively with rate cuts due to overhanging growth and liquidity issues. Apart from this, market participants are expecting timely interventions to bring much-needed financial stability. NRI homebuyers will get the benefit of this reduction if they opt for home loan provided banks will pass on the benefit to customers," said Nimish Makvana, president of the Indian Business and Professional Council - Dubai.
"The Monetary Policy Committee unanimously cut the repo rate by 25bps to 5.75 per cent and, notably, changed its stance from neutral to accommodative. Both these steps were much needed in our view and are quite welcome. The policy action and stance change were clearly driven by mounting growth concerns with the RBI explicitly stating that a sharp slowdown in investment and continued moderation in consumption is a matter of concern."
Kapil Gupta, economist at Edelweiss Research, said: "The outlook for inflation, however, remains benign with the consumer price inflation projection left broadly unchanged at 3.3 per cent for fiscal year 2020. And the RBI expects transmission to improve going forward and stated that it will keep liquidity sufficient thereof. Going ahead, we expect monetary easing to continue given sluggish global and domestic growth. Inflation dynamics are also expected to remain benign and, equally importantly, the US Fed is turning dovish. Against this backdrop, we expect additional reduction of 50bps during fiscal year 2020."
Given the third consecutive rate cut, it is now apparent that growth concerns top MPC members' minds. The RBI downplayed inflation risks while unequivocally mentioning that growth impulses have weakened significantly and output gap has widened. It also stated that a sharp slowdown in investment activity along with moderation in consumption is worrying and the MPC has room to address growth concerns within the ambit of its flexible inflation-targeting framework, Gupta said in his statement to Khaleej Times.
Krishnan Ramachandran, CEO of Barjeel Geojit, said: "The repo rate cut of 0.25 per cent by the RBI was on expected lines. However, the backdrop of uncertainty that prevails in financial markets - especially on account of IL&FS, DHFL, ADAG, etc - has taken precedent over the rate cut. Added to this is the projected drop in GDP growth rate and the levels unemployment that prevails in the country. The silver lining that one hopes for is for a reform-oriented budget on July 5 and a good monsoon season across the country, which can help propel demand for goods and services across various sectors."
Expect another 50bps cut
"After many years, growth seems to be finally gaining currency in the RBI's policy function - a welcome change. At the beginning of the year, it forecasted a 75bps cut in the current year, but had argued that more is warranted," Edelweiss Research says.
"Having already cut the repo by 75bps on aggregate in the first half, the RBI is being more accommodative and with the global monetary policy shifting towards an easing bias, we now expect at least another 50bps cut in fiscal year 2020. However, this needs to be supported by adequate liquidity for efficacy."
Developers remain bullish
The real estate sector in India remains bullish as government launches reforms to boost growth. Rajat Rastogi, executive director, Runwal Group, said: "The hat-trick of the rate cut for calendar year 2019 will have a positive impact on the Indian economy. Presuming that the banks will extend the benefits to the customers which will lead to lower EMI and higher purchasing power capacity of the home buyers."
"A stable government at the centre, declining interest rates along with new reduced GST rates collectively will encourage the buyers to buy their dream home."
Echoing similar, positive sentiments, Ankit Kansal, managing director and chief executive officer, 360 Realtors, said: "Of late, the Indian economy has been plagued by plummeting private consumption. The repo rate cut is likely to infuse more liquidity in the market and provide a push to the decelerating consumption. The real estate market is also welcoming the step, as it should result in cheaper loans, thereby further adding on the momentum in the sector. The uptrend in already visible in the market as due to attractive prices, transaction volumes have increased in tune to 40-60 per cent on a yearly basis. Cheaper home loans will help in further revitalising the market."
"The RBI's decision will definitely make home loans cheaper and also increase liquidity in the banking system. The RBI has given positive signs showing that the market is improving and finally the financial institutions can now start on to pass the benefits to the end-users. A stable government, cheaper loans for home buyers and rising demand will create renewed interest in residential property purchase from end-users," said Sarojini Ahuja, vice-president for sales and marketing at Transcon Triumph.
Hiral Sheth, HOD of marketing at Sheth Creators, said: "This is the third consecutive rate cut this year which will definitely help in bringing down the home loan interest rates and will also bring some amount of cheer to the homebuyers. As EMIs are likely to fall due to drop in interest rates, the demand for housing should rise and propel the growth of the industry. The real estate market is quite bullish with Modi 2.0 coming in action and will further boost sentiments of the buyers."
Manoj Paliwal, chief financial officer at Omkar Realtors, said: "The RBI's 25bps rate cut will surely result into benefitting the end-user with banks and home finance institutions to pass on the benefit to home buyers. It has been a scenario where home buyers have been in a 'wait-and-watch' mode until the formation of the new government, who effectively deferred their home buying will surely result in good buying as an investment asset which will overall have a positive impact on the market sentiment."