DNA ROUNDTABLE: Will rate cut lift growth?

Earlier this month, the Reserve Bank of India cut its policy rate by 35 basis points, its fourth this year, to prop up the struggling economy. The economic growth has been steadily taking a beating over the past few months due to several factors ranging from the crisis in NBFC sector to slowdown in construction and realty sectors, and plunging automobile sales. 

However, banks have not entirely passed on the benefits of the recent RBI rate cuts to consumers. Although, a few banks such as SBI have taken the lead in slashing the interest rates, several others are yet to do their bit. In the wake of a subdued economic growth amid weak aggregate demand scenario, industry honchos are hoping the government will soon initiate more steps to jumpstart the economy. With the government looking to increase spending, infrastructure projects can get a boost. 

Also, on the real estate front, industry experts feel there is a need to bring in reduction in rates across all segments of residential real estate and not just affordable housing, they feel.

Rajnish Kumar, chairman, State Bank of India

Reserve Bank of India's apprehension about banks not passing on the benefits of lower rates to customers is being addressed by the new repo-linked home loans and also working capital loans that banks launched. While State Bank of India kick-started the process in July itself, other banks are following suit after the new credit policy.

India is in the downward interest rate cycle. With the RBI undertaking four consecutive rate cuts, a faster transmission has now been possible as banks have positioned the repo rate as a benchmark for some of its corporate and retail loans. SBI, for instance, has ensured that the central bank's rate actions are reflected immediately on its lending as well as deposit rates. Cash credit and overdraft facilities have hit a low of 7.65% to prime customers.

However, reducing the cost of funds is only one part of the investment decision of companies and retail borrowers. When interest rates come down, there is a tendency by retail borrowers to invest in a home or buy a car. The companies also take investment decisions but finally, it all depends on the rate of return or the capacity to buy.

Led by government spending, infrastructure sector projects should get a boost. For SBI, the project finance pipeline includes proposals from the road, renewable and oil and gas sectors. The funding requirement of all these projects, including city gas, could be Rs 1 lakh crore upwards. We could have a 20-25% share out of this. But these are long-gestation projects. 

We also need to see how repo-linked home loans grow across the banks to stimulate credit growth. Real estate developers have told me that they are trying to get rid of the inventories and they have not increased prices for the last five years. With the reduction in lending rates and with the festive season around the corner, buying is expected to happen. Affordable housing and tax sops should help the construction sector.

A falling interest rate scenario should be able to last for a year. This is obviously good for bank customers. But they should also be aware that if interest rates start climbing, their equated monthly instalments (EMIs) will also rise as fast as it had fallen.

Besides rate actions, the government and RBI have taken concrete steps to address the problems of non-banking finance companies (NBFCs). This is set to improve the NBFC sector's liquidity position. By allowing banks to classify loans to NBFCs for key areas such as agriculture, housing and small and medium businesses as priority sector lending, the RBI has opened the liquidity tap for NBFCs.

Consumption credit has definitely seen a slowdown this year and issues in the auto sector needs to be fixed. But SBI has done reasonably well in housing loan and loans against salary.

The year-to-date (YTD) credit is expected to turn around in the second quarter aided by the policy measures and easing of interest rates.

Niranjan Hiranandani – national president – NAREDCO & SR VP-Assocham

In a global scenario which is best described as 'challenging', and a domestic economy struggling with low levels of investment and growth, Indian real estate was looking forward to some major announcements from the Monetary Policy Committee (MPC), led by Reserve Bank of India (RBI) Governor Shaktikanta Das.

The announcement went beyond the previous instances of announcing a 25 bps hike in rates – and yet, the 35 bps cut in the repo rate announced is not expected to have a major impact on mid-budget and high-end residential real estate. This is fourth time in a row that the central bank has cut the key rate this calendar year. Starting February 2019, the cumulative repo rate reduction has been 110 bps. The real motive is the actual transmission of the rate cut benefit to end users in order to budge the consumption.

Consider State Bank of India (SBI), when it comes to interest rates on loans, post the June MPC review, it reduced marginal cost of funds based lending rate by 5 bps across all tenors with effect from July 10. And yet, there has been no change in the base rate at 9.95% and benchmark prime lending rate at 13.80% since March 2019. This is an example that applies across India's banking system. Effectively, the benefit of rate cut has not been percolated down to the home loan customers, which is one of the paramount reasons to trigger the sales momentum. Hence, banks have cushion to straight away reduce home loans EMIs by slashing down the interest rates further to ease the burden of home buyers.

As priority sector lending, home loans have minimum instances of defaults, so there is a need to bring in reduction in rates across all segments of residential real estate and not just affordable housing. In metro cities, there are hardly any affordable homes being constructed, so any benefit that is restricted only to the 'affordable' housing segment does not have any impact on the residential real estate in metro cities.

Coming back to this 35 bps rate cut, it does have the potential for affordable housing segment to witness an uptick in sales. From a macro-economic perspective, this rate cut aims to encourage consumer spending in a scenario which has been rather gloomy, given the economic slowdown and declining consumption. This being the focus, the reduction of 35 bps in the repo rate is obviously welcome.

Coming again to the previous instances of rate cuts, these have definitely had a positive impact on the sentiment where home buyers as industry stakeholders are concerned; but 25 bps does not amount to a huge difference in EMI rates – this, again, presupposes that the rate cut is transmitted by the banks to the end customers, which is not as quick – or in the quantum- as would be expected.

From a real estate perspective, any rate cut by the RBI may not have an immediate impact on disposing off the unsold inventory by the developers as the roll over effect to convert into demand is a time consuming process. The rate cut definitely lifts the confidence index of a homebuyer, thus inducing him to step forward and close the transaction of his dream home. Similarly, as rates reduce, will developers reduce rates is another question where the answer differs from developer to developer.

We need to keep in mind that Indian economy is facing challenging times amidst geo-political pressure brewing up and subdued domestic economic growth in the backdrop of a weak aggregate demand scenario. It is a globally known fact that real estate and infrastructure sector act as a catalyst for being the economic drivers and augment job creation. Therefore, booming real estate and infrastructure sectors are imperative to turn economic growth headwinds into positive direction.

Abhishek Lodha, managing director, Lodha Group

This is the start of the interest cut cycle – next 12-18 months are the best time to buy your home.

The recent rate cuts by RBI reflect the consumption and private investment weakness in the economy. While there are many theories about what has caused this weakness, one of the primary factors is the high real interest rates – to explain better, when salaries (a proxy for inflation) used to rise annually at 10-12%, interest rates were 10-11% and it made sense to buy. Now with salary growth down to about 5% and interest rates still at 9-10%, consumers and businesses have decided to defer spending – the cumulative impact of this is leading to economic weakness and more importantly, job losses.

The good news is that India has plenty of ammunition to fix this quickly due to the efforts of the government from 2014 onwards; inflation (price rise) has structurally come down and now our core inflation (excluding food and fuel) is similar to developed economies – around 2-3% p.a. This means the interest rates at which banks lend to consumers and businesses should be around 5% - over the next 12 to 18 months. India will see a significant reduction not just in the RBI's benchmark rates (rate at which RBI lends to banks) but in the rates that banks lend to consumers and businesses. If done quickly and with clear direction (as the US Fed Reserve did in 2008), India can quickly go back to creating new employment and GDP growth of over 7%.

This presents a very compelling opportunity for consumers – currently, prices of homes are down and these will start rising from 2021 as supply reduces and interest rate cuts spur demand. Thus, next 12-18 month offer a smart opportunity for home buyers to buy at low costs using a variable rate loan in which interest rates will keep reducing as banks cut lending rates. And to be doubly sure, buy only from those developers with strong track record of delivery and quality and focus on good locations. 

As is said, no one can time the exact bottom or top of the market – the smart investor or buyer is one who understands the general direction and takes advantage. Once every one understands this, prices would have already started rising and the opportunity could have passed. 

All Indians should continue to have confidence in our strong leadership and demographic advantage – I remain confident that, with some ups and downs, India's economic trajectory will return to a much more positive sentiment in next 12-18 months.

Harsh Roongta, Sebi-registered personal finance consultant

Reserve Bank of India (RBI) cut rates by 1.10% in four consecutive monetary policies from February earlier this year. If you take a look at SBI's 1-year MCLR (to which the SBI home loan interest rate is linked), it has dropped from 8.55% to 8.25% or a total of 0.30%. The cost for new home loan borrowers has dropped by only 0.30% per annum. The prime argument of banks is that since they do not use the repo facility so change in repo rate is not cardinal to fixing home loan rates. They also complain of a time lag between the repo rate cut and repricing of their deposit rates.

Both the arguments hold good but when the same signalling rates are moved upwards by the RBI, the banks ignore the time lag argument and increase their loan interest rates immediately. It is this sort of tails you lose, heads I win philosophy of the banks that is particularly galling.

So, all banks try and reduce rates only for new borrowers with old borrowers left to fend for themselves. Late last year, RBI introduced a requirement to make it compulsory to link all home loan rates to external benchmarks such as repo rates, treasury bill rates, etc effective from April 1, 2019. This move would have resulted in complete transparency while fixing rates on loans. However, RBI has indefinitely postponed the implementation of this regulation. Instead we have the “nudge nudge wink wink” approach whereby the RBI governor exhorts the banks to pass on the rate cuts. In fact, things have got so bad that even the prime minister himself had to urge banks to pass on this benefit.

In response to this pressure, SBI and other banks have announced an excellent repo rate linked home loan scheme where the interest rate is linked to the repo rate. Assuming the scheme is implemented transparently, a home loan of Rs 30 lakh under this RLLR (repo linked loan rate) scheme would be priced 8.40% (RLLR of 8% plus spread of 0.40%) versus a rate of 8.55% under the old MCLR scheme (MCLR of 8.40% plus spread of 15 points). Those who took the loan under the RLLR scheme not only got it cheaper to start with, but their cost will drop to 8% from September 1, 2019. Those who took under the MCLR scheme will continue to pay 8.55% for a year before any rate changes take effect. In an era where RBI stance is accommodative, and it is widely expected that repo rates will move down, it will be stupid for anybody to take the MCLR linked loans rather than the RLLR linked loans. But note the sequel. So, all this is only meant for borrowers who are borrowing for the first time. It is not clear whether it is even available to SBI's own existing borrower base to shift from the MCLR based loans to RLLR based loans.

This time it is new wine in new bottle but only for new borrowers. The more things change the more they remain the same.

Dhiraj Relli, MD & CEO, HDFC Securities

Indian markets have already reacted to the rate cuts and monetary policy changes. While cost of money is important, availability of credit to deserving borrowers, we feel, is also important. The recently announced rules for the guarantee for NBFC assets may begin the process for easier availability of funds through the NBFC route, although these rules prima facie seem to be with tough riders.

Equity markets could remain volatile in a range for the next couple of weeks looking for positive triggers in terms of resumption of growth locally and revival of FPI inflows. This could offset the negativity in the overall sentiments due to persistent negative news flow. 

While global growth resumption will be important for Indian equity markets, our markets will also look forward to greenshoots of growth revival, locally, in the festive season or soon thereafter enabled by better liquidity availability.

Lower interest rates theoretically increases the attractiveness of equity as an asset class due to higher valuation that can now be given and lower costs to enterprises due to low interest costs which leads to higher profitability and EPS. However, the key issue is to determine the timing of the end of the rate cuts as till then the equity markets may not make a bottom.

Rate cuts can only work so much. Liquidity availability is more important than the cost of liquidity in most cases. Hence, making the liquidity available to deserving borrowers may work wonders. Also, the transmission of rate cuts has to be commensurate and fast.

If deposit rates can be cut easily, banks can look at cutting lending rates. However, this is difficult as long as small savings instruments yield high returns. Also, banks are looking to build cushion by way of high interest spread at a time when they are unsure of the provisioning requirements due to slippages. The fact that the competition from NBFCs is limited gives banks the leeway to postpone rate cut on lending.

At the outset, the funds meant for equities may not be deployed in debt as the funds have mandates to invest in either asset classes. However, fungible funds or balanced / hybrid funds have the flexibility to shift between equity and debt depending on the relative attractiveness at a particular point in time. While equity markets are seeing a lot of turbulence and underperformance lately, debt markets in India offer an attractive opportunity despite the recent rally in bond prices and the credit issues faced by some funds.

The current conditions globally are well known. Central banks across the globe are maintaining monetary easing stance and soft interest rates hoping that these measures will help revive the economic growth which has been anemic for some time. Even in the 2008-2009 period the world grew at -1.7% to +1.8% compared to 2.5% expected in 2019. Economic momentum in India has seen disruption due to a series of events over the past 2-3 years. The liquidity crisis, the lack of lendable funds with NBFCs and the reluctance of banks to lend in an era where new sectors are throwing up NPAs have also added to the misery. A turnaround in sentiments is required in the backdrop of global troubles. While the Govt is not expected to take its feet off the compliance pedal, some nudges/reliefs to key areas are needed with closely supervised action plan. Free giveaways have to be avoided as much as possible so that people recognize the importance of earning a decent living on their own by developing relevant skills and not live on doles. Indian growth may see some sort of a turnaround in 2HYFY20 especially towards the end.

Sachchidanand Shukla, chief economist, Mahindra Group

Since July 2019, 25 central banks have cut their respective policy rates given the barrage of negative global newsflow. Back home, the RBI's MPC cut the repo rate by an unconventional 35 bps for the fourth time this year in its policy meeting on August 7, taking the cumulative rate cut to 110 bps. It also lowered its FY20 growth forecast to 6.9% from 7% forecast in June.

But, can this alone do the trick in a country where high frequency numbers and the overall commentary continues to surprise on the downside?

Well, to begin with, the transmission of rate cuts has been disappointing. The RBI averred in its statement that despite a cumulative rate reduction of 75 bps since February and a change in the policy stance to “accommodative'', the move has led to 102 bps drop in the 10-year government bond yield but has translated to only a feeble 29 bps cut in the bank loan rates. 

In fact, the Weighted Average Lending Rate (WALR), which had been increasing for fresh loans between January-May 2019 in spite of rate cuts, has come down by 18 bps in June. However, SBI has cut its MCLR by 15 bps, roughly passing on 40% of the benefit of the latest RBI rate cut to its borrowers and raising hope that the rest of the banking system too will follow suit and the benefits of all this will start to trickle in from the festive season.

It is important to note that the fiscal impulse in the Indian economy remains extremely weak. While the Centre's spending is up 2% YoY in Q1FY20, the aggregate spending of 18 key states is up just 0.2% YoY. This is largely owing to tepid revenue growth which will continue to constrain the government's ability to pump-prime the economy. 

Given that the economic deceleration has intensified over the past few months and data broadly paints a picture of subdued demand, notably in private consumption - firms and households continue to hold back spending, indicating that simply rate cuts will not be able to dispel the clouds of gloom in the absence of a fiscal push.

Thus, what is required to tackle the cloud over the growth outlook is a collaborative effort where the government also chips in with the targeted sector-specific measures. Sectoral woes in automobiles, housing and small businesses must be addressed on an urgent basis. The government surely is listening but the question is how soon will it react?