Created on 15.10.2016 22:56:49

In an indication that the RBI, headed by its new governor, Urjit Patel, is inclined to address issues related to growth, the central bank announced the first rate cut in six months earlier this month
Urjit Patel, who took over as the governor of RBI in September, announced the first rate cut in six months, somewhat easing the brake in place since April this year.

Heading a new six-member monetary policy committee (MPC)--which is entrusted with the task of fixing the benchmark policy interest rate (repo rate) to contain inflation within the target level--Patel oversaw an unanimous vote to bring down the repo rate by a quarter of a percentage point, to a six-year low of 6.25%.

Apart from being the first policy decision of the MPC, this is also the first policy statement from the RBI after Patel took charge as its governor. The announcement was a pleasant surprise, as the general expectation was that the central bank would hold rates until December. This is also an indication that the present regime in the central bank is inclined to address issues related to growth.

While cutting the rate, the MPC maintained the projection of growth at 7.6% for 2016-17 and envisaged an inflation trajectory taking headline consumer price index up to 5%, by March 2017.

However, banks have not passed the benefit of the rate cuts to borrowers, as they have not brought down their lending rates by the same extent. For instance, home loans were available at 9.95% when the repo rate was 7.5% in 2013. Since then, the repo rate has fallen sharply to 6.25%. But the lowest home loan rates continue to be around 9.25%.

“With a considerable inventory size of ready-to-move-in properties in the market, the sector needs support of financial institutions to accelerate the momentum of recovery,“ Getamber Anand, president of Credai National, said.

He said that the developer community has already reduced prices substantially and, in the face of the present rate cut, if the benefit is not passed on during this season in the form of a sub-9% interest rate, consumers would miss out on their dream of buying a house and that the banking sector and the housing finance organizations would be solely responsible for this.

Such resistance in passing the benefit of the rate cut to home loan borrowers, when housing mortgage accounts for less than 1% of the NPAs, defies logic. There is no reason why the interest rates on home loans should not reflect the support from the RBI and the government to the real estate industry.

A further rate cut, the low-cost pressures on the construction industry, and the gradual revival of sentiment augur well for the real estate sector, Anuj Puri, chairman and country head of JLL India, said. “The rate cut has come at the right time, provided that banks pass on the benefit to borrowers. At present, everyone is gearing up for the festive season,“ Deepak Kapoor, president of Credai Western UP, said. “This is the time that potential customers plan to invest in property. We are hopeful that if the rates keep falling in future as well, the impact could be huge and positive for real estate sector,“ Kapoor said.

“The developer community has taken up `Mission Possession' in right earnest and, therefore, this is a win-win situation for developers as well as homebuyers. The RBI's latest cut in rate will encourage banks to cut interest rates and, in turn, prompt investors and end users to buy in the property market,'' Gaurav Gupta, general secretary of Credai Raj Nagar Extension, said.



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