RBI status quo leaves a trail of disappointment

Geetu Vaid

The hopes of home loan rates going down further are going to remain unfulfilled for the moment as the RBI decided to maintain status quo on key lending rates in third bi-monthly monetary policy review earlier this week. The policy review of the RBI’s Monetary Policy Committee (MPC) was the last one for FY 2016-2017. The short-term lending rate that is charged on borrowings by commercial banks will remain 6.25 per cent and the reverse repurchase rate  at 5.75 per cent. 

The move was termed as disappointing by the realty players as well as homebuyers as there were expectations that the thrust offered to affordable housing in the Budget would be complemented by the repo rate cut that would result in lower home loan rates being offered by the banks. “Buyers looking for mid-segment houses have once again been abandoned by policy makers as the Budget had nothing for them and now whatever little hope one had of home loans getting cheaper have also been dashed,” said Manoj Gupta, who works in a PSU in Haryana. This is the second time in a row that the RBI monetary policy review has skirted the repo rate revision, the rates were kept unchanged in December review also. “A rate cut at this point of time after the demonetisation and Budget would have pushed the banks to further drop their lending rates ”, says Mehak Goyal, an IT company employee based in Chandigarh. 

Thumbs down by experts

Market experts have given a thumbs down to this move.  “The RBI’s decision to keep the policy rate unchanged is disappointing for the sector. With controlled inflation and the government showing fiscal prudence, one expected the Monetary Policy Committee to have cut the policy rate by minimum of 25 bps. This would have offered banks leeway to further lower lending interest rate to increase capital expenditure and spur growth in employment and sentiment prevailing in the economy. All these factors would have given substantial impetus to the beleaguered real estate sector,” commented Shishir Baijal, Chairman & Managing Director, Knight Frank on Wednesday.  

“The realty sector was expecting a cut post demonetisation especially when even last time the RBI did not cut REPO rate. The sector needed some boost in terms of lower borrowing costs especially when remonetisation may lead to higher borrowing costs. Housing demand (absorption) across key cities have already declined by 31 per cent largely on uncertainty post demonetisation, which led to very few transactions materialising in both primary and secondary market in Oct-Dec 2016 quarter.  As real estate sector in India is sensitive to repo rate cuts which lead to lower borrowing costs for homebuyers and triggering demand, this announcement will further impact the ailing realty sector,” rued Samir Jasuja, Founder and CEO of PropEquity.

Expressing surprise over the RBI decision Anshuman Magazine, Chairman, India and South East Asia, CBRE says, “While the recent demonetisation drive has brought in the necessary liquidity into the banks, lowering the repo-rate would have helped ease borrowing costs. This would have provided an added thrust to the government’s initiatives for affordable housing and fueled demand. A low inflation rate amidst slowdown in projected economic growth provided a conducive environment to reduce rates.”

Developers surprised

The developers’ lobby has also been disappointed with this move as this would make the current stagnation in the market prevail for more time. Deepak Kapoor, President CREDAI-Western U.P. & Director, Gulshan Homz says, “ Looking at the current market scenario, we were anticipating a repo rate cut by at least 25 basis points as the banks were already holding high liquidity and the benefit could have been passed onto the buyers”. 

Lower interest rates just ahead of the financial year closing could have allowed the buyers to plan their future investments, and realty sector would have benefitted the most especially after the recent lending rate deductions by the banks. 

According to Kushagr Ansal, Director, Ansal Housing, “We had pretty much entered a rate reduction cycle which was bringing back the demand for property investments in the market. After a populist Budget, a rate cut should have been there but the RBI has gone against the market forecasts. A rate reduction could have allowed the realty buyers to plan property purchase. Banks are still to pass on the benefits of the previous repo rate cuts and a deduction at this time could have ensured a cut by the banks.”

The hopes of the sector had been high this time as the banks were flushed with cash post demonetisation and could lend more at lower rates. “The government borrowings had reduced to Rs 3.48 lakh crore from Rs 4.25 lakh crore as presented in the Budget, which meant that a rate reduction was quite evident. A rate cut now could have allowed the potential buyers to invest in property as the EMIs would have reduced further in coming months”, says Vikas Bhasin, MD, Saya Group.

However, considering the current economic scenario in the country the RBI’s move doesn’t seem to be completely out of context or unexpected. The impact of demonetisation is yet to be completely assessed and that along with growth rate and inflationary pressures are the factors that have to be factored in to time rate cuts. Highlighting the logic behind the status quo maintained by the RBI Vineet Relia, Managing Director, SARE Homes says, “RBI’s decision is disappointing, though not unexpected. The fact that credit growth has slipped to multi-year lows, despite lending rates falling by nearly 150 basis points since early 2015, is proof that other factors are at play. Demonetisation has accelerated the transmission of rate cuts over the past two months. While it has benefited select borrowers, it has squeezed incomes for most savers, with deposit rates plummeting over two percentage points over the past two years. A cut in policy rate may do more harm than good if inflation creeps up with the rise in global commodity prices. India needs positive interest rates to induce savings and push up investments. Nonetheless, since demand in real estate and allied industries remains sluggish, a rate cut could have improved liquidity and created renewed interest in property purchase.”

All eyes on banks now

Putting the onus of home loan rate reduction on the banks Amit Modi, Director, ABA Corp and Vice President CREDAI Western UP says, “It is an expected move as theRBI had reduced the repo rate by 0.25 to 6.25 per cent in October to signal lower interest rates in the economy. Hence RBI has done its part, the banks on the other hand have not been generous enough to pass on the entire benefit of this reduction to end consumers. Since now the banks are flushed with cash and don’t have to worry about reviving their bottom lines, they should now be passing the benefits of the previous rate cuts to the end consumers”.

However, with banks having more liquidity, the loan rates are going to be lowered in near future and moreover with competition among banks intensifying the new home loan borrowers can expect better deals now with or without the repo rate cut immediately.