After FM, RBI next to dole out sops to homebuyers

It is bonanza time for homebuyers, as the government is working on packages to pump up consumption in a worryingly slowing economy. After Finance Minister Nirmala Sitharaman's Rs 20,000-crore fund support to boost growth in the housing sector, the Reserve Bank of India (RBI) is expected to sharply cut rates when it unveils its monetary policy on October 4.

For home purchasers, this will mean a further fall in their equated monthly installments (EMIs), which is hovering around mid-8% currently.

The benign inflation and an economic slowdown may propel the RBI to cut rates by 40-50 basis points in its upcoming credit policy. The macro indicators are conducive for an interest rate softening, banking experts said.

The consumer price inflation for August announced last week was well below RBI's medium target of 4%, allowing legroom for a rate drop.

The six wise men of the Monetary Policy Committee (MPC), who decide on interest rates, will be encouraged to vote for a sharper cut.

RBI's hawk eye on faster transmission of rate cuts by commercial banks to their consumers will also continue.

The central bank has already directed all banks to link their lending rates for retail loans and loans to medium-and-small enterprises to an external benchmark from October 1. The external benchmark is the repo rate or the short-term rates on the government bonds.

Most of the public sector banks have announced that their rates will be linked to the repo rate. Private banks are yet to announce details of their efforts to link their lending rates to retail borrowers and small corporate borrowers.

"After a dismal growth performance in the first quarter of the current financial year and with inflation staying benign, MPC's focus will remain on addressing the weakening growth trajectory. We expect the MPC to cut the repo rate by up to 75 bps through the rest of FY2020—including a cut of around 40 bps in the October policy—with focus remaining on transmission," Kotak Securities said in a report.

The consumer price index (CPI), which is the food inflation and the key indicator that influences the rate actions, rose marginally by 3.2% in August but it was a stable rise and lower than the RBI's medium term target of 4%. There has been a moderation in prices of meat, fish eggs, fruits, vegetables and pulses, which is generally seasonal and expected to remain low.

"We believe there is a rising case for a 50 bp RBI rate cut, on 4 October, with August inflation coming in at a lower-than-expected 3.2% last week. Core inflation (ex gold) is a reasonable 4%. We track September inflation at 3.6% - well within the RBI's 4-6% mandate," said Bank of America Merrill Lynch in a report.

In August, RBI had for the first time cut rates by 35 basis points with the governor, Shaktikanta Das, stressing that it was critical to support growth.

ICRA presented a more conservative rate cut in the October policy. "Based on the mild rise in the CPI inflation in August 2019, despite the sharp uptick in food inflation, we expect a 25 bps cut in October 2019, to support slack economic growth," said Aditi Nayar Principal Economist, ICRA.

With money market rates having come down by over 200 basis points, the lending rates of banks will also get revised once the external benchmarks are linked to the price of the loan.

"Lower yields and lending rates hold key to growth bottoming out by early 2020. Transmission should be faster with banks linking 50% of their book to an external benchmark," Bank of America said in its report.

Core inflation remained stable despite large one off contributions from segments such as gold. A sharp slowdown in high frequency data, fall in global crude oil prices, slowdown in global growth amid trade war concern indicates that core inflation is likely to remain subdued.

"Medium term Inflation target is well within RBI's 4% range. Therefore, further rate cut expectations from RBI remain as growth concerns and global low rate environment outweigh a marginal rise in inflation. We expect further rate cut in October monetary policy meeting," ICICI Securities said.