RBI Governor Shaktikanta Das gives a massive relief to the realty sector - that the Union Budget did not

  • RBI maintained its status quo and left interest rates unaltered.

  • It relaxed NPA classification for real estate sector loans. It also said banks need to maintain extra CRR for loans to housing and MSMEs.

  • RBI also said that it will maintain accomodative stance as long as it is necessary.

  • Manufacturing PMI is scaling to a near eight year high of 55.3 in January 2020.

India’s central bank today kept the base interest rates unchanged at 5.15%. However, it also provided a huge relief to the real estate sector wherein this sector’s loans will be given an extra year before they will be classified as non-performing assets.

It means that builders have extra time to stay solvent before their loans land in the 'bad debt' pile of banks. This move will also ensure that housing finance companies which are stressed with bad loans, will not have to bear more brunt.

In addition, the Reserve Bank of India (RBI) also wants banks and other finance companies to lend more for buying homes. The policy also said that banks will not have to maintain their cash reserve ratio for extra loans that will given to auto, housing sector and MSMSe. CRR is the amount that banks have to maintain with the Reserve Bank of India (RBI) at all times. Today's monetary policy also said that it will maintain its accomodative stance as long as it is necessary.

"While this will be beneficial to banks which can be incentivized to lend more to these sectors, the present state of
excess liquidity may not really warrant such action on a large scale. However, to the extent that resources are freed
from CRR they can be invested even in the reverse repo auctions at the limit to accrue a net gain," said a report by CARE Ratings.

Stock market gains
The stock market which has been trading flat all morning spiked after the announcement. The BSE Sensex gained 189 points and Nifty gained 39 points. Stocks like HDFC gained by 1.71% while DHFL which is in insolvency process also gained by 5%.

RBI also said that its inflation projection for the second half of the current year at 5.1-4.7% was overshot in December - but is likely to soften going forward. "First, food inflation is likely to soften from the high levels of December and the decline is expected to become more pronounced during Q4:2019-20 as onion prices fall rapidly in response to arrivals of late kharif and rabi harvests. Higher vegetables production, despite the early loss due to unseasonal rain, is also likely to have a salutary impact on food inflation," the policy document said.

Even as the RBI governor indicated that any more rate cuts will depend on data, few economists believe that it is possible - since inflation is still high at 5.45%. “As expected the central bank has maintained status-quo, to evaluate the inflationary environment and achieve the desired fiscal developments.We believe any further rate cuts would be delayed. The policy makers are keenly watching the implications of all the past policy announcements including the well-balanced Budget 2020.




The five fold cut in the past

The RBI has been more than generous last calendar year while setting its base rate. It cut its repo rate - the rate at which it lends to banks - by five times, consecutively. This credit policy however, it was widely expected to maintain its status quo and leave interest rates unaltered like it did in its last and final policy of 2019.


In December, CPI inflation spiked to an unexpected five-year high of 7.35%. This inflation pushed by vegetable prices had gone beyond the upper band of RBI’s expectations. Consequently, it has become wary of taking chances.
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A crude awakening


When it cut its rates five times last year, it was cushioned by benign inflation rates. Inflation of food and non-food items both can be affected if the Reserve Bank of India (RBI) decides to release liquidity into the system by tinkering interest rates. Since it was low, it had the option to cut its rates. All this changed last month.


However, the spike in inflation seems to be coming down. Since India is a net exporter of crude oil, the scare of a possible war like situation has kept economists on the edge. However, that worry has passed and crude oil prices fell to $55 a barrel - and inflation is subdued yet again.


In spite of this, analysts expected the RBI is expected to keep base rates unchanged at 5.15%. For one, its endgame has been achieved. “The previous rate cuts were transmitted by the banks to borrowers as evident from the low marginal cost in banks lending rates,” said a report by Brickwork Ratings. This is an effect of the many rate cuts and though slow banks have started transmitting them to their borrowers.


A job well done


The need for the central bank to push for growth might be reducing. Due to various government stimuli, many macroeconomic indicators like index of industrial production (IIP) and core sector performance have improved.


“This, coupled with manufacturing PMI is scaling to a near eight year high of 55.3 in January 2020, growth is likely to rebound next fiscal. We expect GDP growth of 5.5-6% in 2020-21,” said Brickwork Ratings report.


This forecast is much lower than what the government’s economic survey has predicted India’s GDP growth to be - at 6-6.5%. If that is achieved, then the RBI might not have to stress itself with the job of halting India’s massive slowdown.



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