RBI Monetary Policy: Industry Outlook October 2018

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Shishir Baijal- Chairman & Managing Director, Knight Frank India

Shishir Baijal

“The RBI had hiked the policy rates by 50 bps in the previous two policy reviews. Despite global and domestic macro-economic headwinds of rising interest rates in the U.S., rising crude prices, threat of crude oil fuelled inflation, weaker currency and FII outflows, RBI has paused rate hikes for now. While we are in a rising interest rate cycle now, the pause will provide a temporary relief to the home buyer sentiment and support the festive season demand.”

Dr. Niranjan Hiranandani is Founder and CMD, Hiranandani Communities. He is the President, National Real Estate Development Council (NAREDCO)

Hiranandani Group
Dr. Niranjan Hiranandani

RBI holds rates in latest monetary policy review; a section of banks has hiked interest rates a day before – is this an incomplete picture?’ 

The Reserve Bank of India’s MPC was expected to hike rates in its latest monetary review, given the impact of petroleum prices as also rupee value in the global currency market. Instead, it sprang a surprise and maintained ‘status quo’. The banking sector, like it has done just before the past two reviews, hiked interest rates. The RBI didn’t. This has real estate wondering whether it is just a bit of bother – or are we looking at an incomplete picture, and can expect to see something new in the coming days. Home loan rates remain untouched – in theory, as per the RBI’s stance. A section of banks have a day before the RBI announcement, hiked interest rates. So, will we see them reversing the latest hike – or,will we see something akin to the RBI announcing a hike in rates? The jury’s out on this, we will wait and watch.

Sanjay Dutt- MD & CEO, Tata Housing Development Company and Tata Realty and Infrastructure Limited

“The RBI’s decision of keeping the repo rate unchanged at 6.5% will prove to be beneficial for the real estate market. The correction in oil prices by the Central Government, the upcoming festive season coupled with the stable home loan rates are likely to improve home buying sentiments. For Tata Realty, our sales have increased in Q2 and we are looking at a continuous growth in the coming months. The RBI’s decision will help us in this aspect.”

Nikhil Gupta- Economist, Motilal Oswal Institutional Equities

Nikhil Gupta
Nikhil Gupta

RBI maintains status quo, changes stance to tightening

Fiscal slippage to determine rate hikes in FY19

  • – In stark contrast to market consensus and in line with our view, the RBI kept its policy rates unchanged. It, however, changed its policy stance from ‘neutral’ to ‘calibrated tightening,’ which diluted the impact of maintaining status quo on policy rates.
  •  This is also in line with the RBI lowering its FY19 CPI-inflation forecast from 4.8% earlier to ~4.3% now. Interestingly, notwithstanding higher 1QFY19 growth, the RBI has maintained its FY19 GDP growth estimate at 7.4%, implying slower than previously forecasted growth in the remaining part of FY19.
  • Overall, we believe that the RBI has taken the right but difficult decision. It, however, needs to give further solid signals to the markets toward its intention to help domestic liquidity and stabilize the financial system until inflation remains comfortable. This is why we are uncomfortable with the change in stance to a hawkish one.
  • According to our projections, CPI inflation will remain under 4% until Dec’18, which gives the RBI no reason to hike rates in the remaining part of FY19. However, we believe that fiscal slippage may prompt the RBI to hike rates.

Abheek Barua- Chief Economist, HDFC Bank 

“This is a risky move by the RBI since the market was positioned for a rate hike, purely as a rupee defence. In its absence currency and asset markets could see sharper corrections. A narrow focus on inflation targets perhaps not desirable in the middle of a financial crisis. Change in stance suggests that the rate hike could still come in the coming months.”

Anuj Puri- Chairman, ANAROCK Property Consultants

Anuj Puri

In its monetary policy today, RBI has taken the unexpected stance of keeping the repo rates unchanged. This is surprising and contrary to the industry’s expectations, which skewed more towards an increase on the back of increasing inflation and depreciation of the rupee. This move could have been seen as favourable for the real estate sector in the short-term; however, banks have already started increasing their lending rates even before the monetary policy was announced. It is, in fact, a worrisome development from a macro-economic long-term perspective. It will result in increased fiscal deficit, which does not bode well for any industry, including real estate, and also in further erosion of the rupee’s value.

B. Prasanna- Group Executive and Head, Global Markets Group, ICICI Bank

B Prasanna, Head- Global Markets Group, ICICI Bank
B Prasanna,

“In an unexpected move the MPC left repo rates unchanged citing a benign inflation trajectory and a downward revision to the inflation expectation one year ahead. It has also possibly taken into account a subtle concern on a possible growth slowdown in the economy on account of several headwinds, including high oil prices, volatile global financial markets, intensifying trade wars and growing uncertainty in the domestic financial landscape. However, they have acknowledged the upside risks to inflation and consequently changed the stance to that of calibrated tightening. This is an indication that the rate hike cycle will be lengthier and the hikes might not necessarily be front loaded. While the messaging has been clear that interest rates as a tool is primarily meant only for the purpose of inflation targeting and not meant for currency defense, we do feel that more rate hikes would be required going ahead based on global market developments and our own projection of the inflation trajectory.“

Adhil Shetty- Co-founder and CEO, BankBazaar

In an unexpected move, the monetary policy committee (MPC) of Reserve Bank of India (RBI) maintained status quo on key rates, with repo rate unchanged at 6.5%. This pause comes after two consecutive rates hikes in June and August. The RBI’s policy mandate is to anchor inflation. Actual inflation at the end of Q2 were below projections at 3.7%. Despite the increase in crude prices and tightening of global financial conditions, the inflation is projected at 3.9-4.5% for the rest of the year and fits within RBI’s target of 4% for consumer price index (CPI) inflation, which could be one of the reasons for holding the rates. The MPC has also changed the stance from ‘Neutral’ to ‘Calibrated Tightening’, indicating that future upward revisions may be possible.

How RBI rate hike could impact borrowers?

Fixed deposits: A status quo in the policy rates means that deposit rates would stabilise or marginally increase. We have recently seen interest rates of small savings schemes for the current quarter go up by 30-40bps. This increase will contribute to driving up the interest rates on bank fixed deposits as well. So, if you are looking for assured returns and safety of capital, small savings are becoming more attractive.

Loans: Though RBI has maintained its stance, some major banks have revised their rates, and more may follow. In such a scenario, your best plan is to try and prepay your loans in part or full. Even a small change in interest rates can have significant impact on your loans, especially in case of long-term loans like home loans, and even a small prepayment can help in a big way.

For instance, if you have a loan of Rs.40L for 20 years at 8.75, your total payable amount would be Rs.84.8L. At the end of three years, your outstanding balance is Rs.37.5L. Assume you repay roughly 10% or Rs.3.5L, your outstanding amount comes down to Rs.33.86L. Even with a 25pbs hike in interest rate, your total outflow would be lower.

Debendra Dash- Head ALM, AU Small Finance Bank

“The RBI has kept the policy rates unchanged with a change in stance for calibrated tightening. RBI has indicated that by changing the stance from neutral to calibrated tightening Repo rate going forward will either remain on hold or increased depending on inflation prints. RBI cuts inflation forecast from 4.4% to 3.7% in Q2FY19; from 4.7-4.8% to 3.8-4.5% in H2FY19 and from 5% to 4.8% in Q1FY20 . While projections for inflation has been revised downwards, inflation trajectory is projected to rise above Aug 2018 print. The change in stance provides RBI the flexibility to raise rates in forthcoming policies. Further RBI emphasised to maintain neutral liquidity by with overnight rate around Repo rate.”