RBI’s MPC announces a 25 basis point rate cut
Reserve Bank of India

Yesterday, August 2, 2017, the Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) issued its third Bi-Monthly Policy Statement 2017-18.  In this statement, the RBI reduced the policy rate under the liquidity adjustment facility (LAF) by 25 basis points, from 6.25% to 6.0%, i.e. a reduction of 25 basis points.

Commenting on the rate cut Brotin Banerjee, MD & CEO, Tata Housing, said, “We anticipate that the rate cut announced today by .25 BPS, coupled with commensurate benefits for borrowers, will impact home loan rate positively and enhance the consumer sentiment. With the market view calling for measures that encourage investment to boost growth numbers, and with the installation of a regulatory regime for the real estate sector, we expect this move to keep the stimulus on for potential home buyers to invest, and to benefit current borrowers.”

Among various factors outlined by the RBI in its press release, a weakened April-May 2017 industrial performance is also mentioned.  Deficiency of demand in electricity generation is sighted as a binding constraint. This is slowdown is also attributed to the excess inventories of coal and near stagnant output of crude oil and other refinery products along with the slow down mining activity.

While talking to Team Estrade, Adhil Shetty, CEO & Co-founder BankBazaar.com, added, “Given that inflation is as per target, and we are entering the next quarter with a steep growth target, there was ample room for the RBI to cut the repo rate. This is the beginning of the festival season across the country with Eid, Ganesh Chaturthi, and Dussera lined up over the next two months. Sectors such as realty, automobile, and consumer durables are expected to see much traction in the next couple of months. The rate cuts at this time mean that the cost of credit required to make big-ticket purchases such as a home or a vehicle comes down even further. This is a very good signal to the market and has the potential to push growth in several sectors.”

The rate cut is great news for India Inc., which has experienced mixed results from government moves post demonetization. The business outlook is definitely positive because of major policy changes such as GST and RERA, however, the pace of this upturn has been a bit slow to pick up.

Commenting on this policy announce, Ritika Mankar Mukherjee, Senior Economist, Ambit Capital, said, It is worth noting that four of six members voted in favour of a 25bps cut. Dr. Dholakia however voted for a 50bps rate cut. In a surprise move, Dr. Patra voted for status quo. The fact that the MPC delivered its second non-unanimous decision is a welcome development and is indicative of vibrancy of discourse at the MPC.” Adding on industrial activity, she further stated,  “Business sentiment polled in the manufacturing sector reflects expectations of moderation of activity in Q2 of 2017-18 from the preceding quarter. Moreover, high levels of stress in twin balance sheets – banks and corporations – are likely to deter new investment. In our view we expect the RBI to administer 25-50bps of rate cut from hereon over the rest of FY18. Even as CPI inflation is expected to trend higher in 2HFY18, we expect expect the RBI to cut rates from hereon mainly because: (1) the Central Government’s net spends have been heavily front-loaded and hence will slowdown from hereon thereby requiring monetary policy to play a more growth-supportive role  and (2) meaningful pressure is being exerted by the Ministry of Finance on the RBI to cut rates.”

The MPC has pointed out that reinvigorating the private investments, removing the infrastructure bottlenecks and a major thrust to Prime Minister’s Housing for All project, are of major importance to improve the state of Indian economy. These all point to India’s real estate industry. These avenues of growth along with the stressed balance sheets of major banks are limiting the flow of liquidity in the economy. Thus making the current rate cut of 25 basis points a logical step. The next meeting of MPC is scheduled on October 3 and 4, 2017. Let’s pray that the economy is in a stronger mode at that point in time.

RBI’s MPC announces a 25 basis point rate cut