The RBI, in its monetary policy review today, swept the markets by surprise by keeping the repo rate unchanged at 6.50%. Urjit Patel mentioned that the RBI was exclusively focused on meeting the inflation target, and has changed its outlook to "caliberated tightening" from "neutral."
The market was largely expecting a rate hike of 25bps given the ongoing concerns regarding rising crude oil prices, the weakening currency, and rising inflationary pressure.
This is how the industry reacted after RBI’s monetary policy outcome:
Abheek Barua, Chief Economist, HDFC Bank
"This is a risky move by the RBI since the market was positioned for a rate hike, purely as a rupee defence. In its absence currency and asset markets could see sharper corrections. A narrow focus on inflation targets perhaps not desirable in the middle of a financial crisis. Change in stance suggests that the rate hike could still come in the coming months."
Rajni Thakur, Economist, RBL Bank
The Central Bank seems to be focussed on keeping the high growth story intact and the trade-off that successive rate hikes could have presented via negative impact on consumption and investment expenditure and widening output gap. A small rate hike under current external headwinds would have had limited efficacy in shoring up the currency and could have taken heavy toll on the economy in medium term. We thus look at the policy decision as a continuation of its cautious and conservative approach and another step towards gaining its credibility as inflation targeting Central Bank. Lower inflationary projections clearly indicate that the Central Bank doesn’t expect oil prices and currency pressures to stay at elevated levels for long.
B. Prasanna, Group Executive and Head – Global Markets Group, ICICI Bank
“In an unexpected move the MPC left repo rates unchanged citing a benign inflation trajectory and a downward revision to the inflation expectation one year ahead. It has also possibly taken into account a subtle concern on a possible growth slowdown in the economy on account of several headwinds, including high oil prices, volatile global financial markets, intensifying trade wars and growing uncertainty in the domestic financial landscape. However, they have acknowledged the upside risks to inflation and consequently changed the stance to that of calibrated tightening. This is an indication that the rate hike cycle will be lengthier and the hikes might not necessarily be front loaded. While the messaging has been clear that interest rates as a tool is primarily meant only for the purpose of inflation targeting and not meant for currency defense, we do feel that more rate hikes would be required going ahead based on global market developments and our own projection of the inflation trajectory.”
Marzaban Irani - Fund Manager Fixed Income - LIC Mutual Fund
As per MPC announcement there is no change in rates. Our initial thoughts say that any action going ahead will be data dependent. Stance has been changed to calibrated tightening which indicates status quo or hike going ahead. Rupee has reacted negatively.
Kunal Shah, CFA, Fund Manager - Debt, Kotak Mahindra Life Insurance Co. Ltd
“The MPC voted for status quo on interest rates at 6.50% with 5-1 vote, the move was against market expectations of 25bps hike. The no change is a signal that inflation remains the prime anchor for the MPC. However surprisingly, the policy stance has been changed to “calibrated tightening” even when MPC has revised down its inflation expectations for full year to 4.31% from 4.75%. MPC continues to see growth reviving to 7.4%. The lower inflation and dropping currency had actually made the choice difficult on rate and guidance, by moving away from neutral, RBI is signaling imminent tightening should inflation risks come to fore due to continued drop in currency and rise in energy prices. RBI governor also asserted that MPC targets headline inflation only and policy setting will operate to achieve 4% target in medium term.”
From the bond market perspective, the no hike policy is surprise outcome; yields have dropped 10bps post policy to 8.05%. The policy outcome will change the terminal rate assumptions by market participants as the message is inflation is the prime and only target. So, with big rate hikes out of the way for now, markets will try to position for further liquidity infusion by RBI through OMO purchases. 10y treasuries should trade in the range of 7.80-8.20% in near term. However, bond markets will closely track currency market, as no change in rates today has upset the currency market.”
Kumaresh Ramakrishnan, Head - Fixed Income, DHFL Pramerica Mutual fund
“Somewhat against market expectations, RBI through a 5-1 vote, held rates unchanged at today’s monetary policy meeting. The decision appears to be driven by subdued headline inflation and continued softness in food inflation. The RBI also lowered its CPI target for the second half of the year, as it expects the inflation print to retain a downward momentum. However, the change to a ‘calibrated tightening’ stance leaves the door open for hikes in the coming months.”
“Near term uncertainties in our view persist from the recent run up in crude prices, a weakening rupee, globally tightening liquidity conditions and some challenges in meeting the fiscal deficit target for the year. Consistent with the change in stance, we continue to expect one to two more hikes in the current rate cycle”.
Sudhanshu Agarwal, Director, KV Developers
To everyone's surprise, the apex bank has maintained the status quo which will serve as a boon for the realty sector in particular, as we are just days away from the beginning of the final festive season for this year. A no change in the repo rate by RBI will make the banks to keep the home loan rates unchanged, thus signalling the buyers to make their home purchases without additional burden on the pockets in the form of EMIs.
KV Srinivasan- Director and Chief Executive Officer, Profectus Capital
“The RBI maintaining status quo on rates displays the RBI’s comfort on inflation. There would be at a least temporary pressure on the Rupee-Dollar rate. The statement on usage of short term funding for giving long term loans by NBFCs is understandable in light of the recent development, but most NBFCs comply with existing Asset-Liability matching guidelines of the RBI. I do not believe the statement points to any systemic issue. Overall the RBI has been appreciative of the increasingly important role being played by NBFCs and I believe that would continue.”
Prasoon Chauhan, CEO, HomeKraft, an ATS company
“This is a welcome news for the housing sector as status quo on rate hike will give the right boost to the sector which has started to do well as evident from solid numbers of new launches and absorption numbers in the last few quarters. We expect with the festive season kicking in, there will be further growth in housing demand for projects by renowned developers.”
Sanjay Agarwal, Partner at TASS Advisors
Retaining repo rate unchanged has fostered RBI agenda to control and retain inflation at projected level of 4 percent. Though it was expected that this time there may be some change in repo rate, but the committee decided not to change. A move likely to control inflation levels in near future.
Anuj Puri, Chairman - ANAROCK Property Consultants
In its monetary policy today, RBI has taken the unexpected stance of keeping the repo rates unchanged. This is surprising and contrary to the industry's expectations, which skewed more towards an increase on the back of increasing inflation and depreciation of the rupee. This move could have been seen as favourable for the real estate sector in the short-term; however, banks have already started increasing their lending rates even before the monetary policy was announced. It is, in fact, a worrisome development from a macro-economic long-term perspective. It will result in increased fiscal deficit, which does not bode well for any industry, including real estate, and also in further erosion of the rupee's value.
Dhiraj Jain, Director, Mahagun Group
The decision of RBI to keep the rates unchanged is a clear indication that the apex bank wants to maintain its vigilant approach in the upcoming two months. With the unchanged repo rate the interest rates will also be same and this keeps on attracting the buyers to invest in real estate sector. Above all the upcoming two months are dedicated to festivals which will flourish the market and uplift the sentiments of the buyers.
Vikas Bhasin, CMD, Saya Group
There is no rate cut in the latest monetary policy by RBI, however, a parallel cut in repo rate and CRR would have brought a win-win situation for the banks. This would have allowed them to reduce the interest rates and keep the surplus funds simultaneously, further enhancing their lending capacities. The start of the festive season in such a way could have in that case become a big sentiment driver for the entire economy.
Gaurav Gupta, General Secretary, CREDAI Ghaziabad & Director, SG Estates
The reduction in rates would have ultimately been advantageous to the customers for the reason that if banks have reduced rates, the same will apply to the end-borrowers too and real estate market will have a pool of demand to deal with the significant two festival months. A rate cut of 25 bps could have helped ease the pressure off the market which has been balancing itself for the last two monetary policy review which witnessed the hike in repo rates. However, with no change offered in this monetary policy review, we expect the market to run with only a static demand in the short run.
Dhruv Agarwala, Group CEO, Housing.com, Makaan.com & PropTiger.com
In case of an economy dominated by low interest rates and having abundance of cash flow, the risk of inflation is greater. Hence, the decision of the RBI to not reduce the rates until it has been fully convinced about the inflation control is very justified. But as we are near to the festive season, a rate cut today would have allowed potential buyers to plan better for their investments in the property market for the current financial year.
Manoj Gaur, Vice President CREDAI-National & MD, Gaurs Group
Even though the apex bank has kept the rates unchanged, but we still believe that there is room for financial institutions to cut down on their lending rates for their customers. Prior to this, the last hike was a 25 basis point in the key rates in the month of August 2018 which failed to bring cheer to the market, however now the stagnant rates today might have helped smooth the economy to some extent and the benefits of which are yet to be fully passed on to the customers.
Deepak Kapoor, Director, Gulshan Homz
Irrespective to the market speculations, the RBI still manages to maintain the status quo. However, any reduction in lending rate allows the sentiments in real estate to improve as the net cost on the buyer for the housing unit gets decreased. But with the market inflation not coming below the medium – term target and potential trade wars among more advanced economies of the world, the apex bank was compelled to maintain the status quo.
Pradeep Aggarwal, Cofounder & Chairman, Signature Global and Chairman, National Council on Affordable Housing, ASSOCHAM
Unchanged rate cut is a lost opportunity for real estate sector as reduction in rates might have improved the market scenario and triggered the demand and sales process. Still, in the longer run we foresee enough room for rate cuts which would spur growth in realty market. Real estate sector being a major contributor to India’s GDP needs enough backing from RBI to give out positive signals further.
Kamal Taneja MD, TDI Infracorp
A cut of at-least 25 basis would have been ideal considering that the festival season is around the corner where sales volumes are usually high. RBI has been increasing the rate in the last 2 consecutive bi-monthly review so decreasing the rate would have been a perfect festival gift. Most of the inventories sold by real estate developers these days are mainly sold on easy home loan facilities and Subvention schemes as interest rates were going down over last one year. With real estate sector trying to overcome and was on revival mode this a decrease of repo-rate during the festival season could have improved the market sentiment in a big way.
Ashok Gupta, MD, Ajnara India Ltd
This policy review did not bring any relief to the real estate sector as rate has unchanged. Realty sector is already on reviving mode and most of the projects in Noida & Greater Noida nearing completion. Therefore, in such a scenario, rate cut was the need of the hour to provide the much needed push to the real estate and to facilitating growth on the other hand.
Ram Aggarwal, Director, Shri Group
RBI’s announcement to keep the status que maintained was according to market dynamics and we expect that once the inflation on track, RBI will take steps to reduce the rates. Although government is taking corrective measures for economic growth and stability, there is a need to adopt a balanced approach considering the growth of key sectors like real estate. Monetary liberty is the need of the hour to gain back the trust of home buyers and investors.