25bps Cut In Repo Rate Welcome But More Could Have Been Done

The Reserve Bank of India surprised the market with sudden announcement of 25bps cut in repo rate on January 15, 2015; the first in New Year and a reduction after a very long time. RBI announced a 25 bps cut in repo rate, which means banks can borrow at a lesser rate from RBI at 7.5% now against 8%. A couple of factors weighed primarily on RBI’s mind – fall in inflation and a sharp reduction in global crude oil prices. Crude oil prices have fallen to below $50/barrel. Unprecedented! 

The November 2014 IIP figures released on January 12, 2015, too, showed encouraging signs with growth at 3.8% as against (-)4.2% in October 2014. The combined effect of these factors prompted RBI to make this decisive cut. The cut also signaled RBI’s move in stance from Inflation to Growth. From here on, rate cuts can be expected to happen at regular interval.

However, even at this juncture, the quantum of cut could have been more. To kick start demand and investment, it is imperative that we move aggressively on the rate front. Noted economist and Columbia University's professor of economic and law Mr. Jagdish Bhagwati rightly said: “I would do what Raghu (RBI Governor) did—lower interest rates. Because inflation is less, oil price has fallen and so on. It's from the demand side that we are having a problem.”

The Real Estate continues to witness absence of homebuyers. High interest rate is a primary reason besides other factors like poor income growth, low confidence etc. These fears are beginning to be dispelled with the Government taking things in its stride and working towards growth, development and empowerment. The Government and RBI must support private sector so that the participation and more importantly channelized participation can bring about a more decisive and inclusive growth.

RBI’s direction to banks to review lending rate every quarter is yet another important move to assess the movement in interest rate. Banks must pass on the rate cut benefits to consumers and respond with alacrity. 

Going forward, another round of rate cut is expected before the Budget 2015-16. The Budget is expected to bring about a slew of reform measures and that complemented with considerate lending rates can stroke demand in every sector – primarily rate sensitive ones like consumer goods, auto, home etc. 

This could possibly also be the correct time for RBI to usher in other measures like allowing banks to lend more to real estate, easy funding norms etc so that the real estate sector plays the role of a catalyst in driving the overall economy.

Mohit Goel | CEO, Omaxe Limited