Inflation Threat Hangs In The Air – RBI

Inflation Threat Hangs In The Air – RBI

Biz Captains Hail Unchanged Repo Rate

RBI looks through idiosyncratic shocks, but if such idiosyncrasies show signs of persistence, we have to act, Governor Shaktikanta Das said.

MUMBAI, Aug 10 (The CONNECT) - RBI Governor Shaktikanta Das today said while inflation has moderated, the job is still not done. Inflationary risks persist amidst volatile international food and energy prices, lingering geopolitical tensions and weather-related uncertainties, he said at the end of the three-day meeting of the Monetary Policy Committee (MPC).

The MPC unanimously decided to keep the policy repo rate unchanged at 6.5 per cent. Consequently, the standing deposit facility (SDF) rate remains at 6.25 per cent and the marginal standing facility (MSF) rate and the Bank Rate at 6.75 per cent. The MPC also decided by a majority of 5 out of 6 members to remain focused on withdrawal of accommodation to ensure that inflation progressively aligns with the target, while supporting growth.

Das said the country has made good progress in sustaining India’s growth momentum. “I reiterate our commitment to align CPI inflation to the 4 per cent target on a durable basis. We do look through idiosyncratic shocks, but if such idiosyncrasies show signs of persistence, we have to act,” he said.

"The decision by the RBI to maintain the repo rates at 6.5 percent is a favourable step, though a decrease in these rates would have positively impacted the optimism of potential homebuyers resulting in stimulated home sales,” said Sandeep Runwal, President, NAREDCO Maharashtra

An adjustment like that would have injected more funds into the pockets of prospective homebuyers, motivating them to make their dream home purchase, Runwal said. Nevertheless, the RBI has effectively managed to keep inflation rates within acceptable boundaries. The Indian economy has displayed resilience against global uncertainties and has exhibited commendable performance. Also, the government has implemented a range of constructive policy measures that have sustained housing sales momentum.

Additionally, the government's resolution to keep the Ready Reckoner (RR) rates steady for the state in 2023-24, has indeed elevated the confidence of homebuyers. We once again make an appeal to the government to consider reducing stamp duty rates, a move that could invigorate the interest of potential homebuyers. It is our hope that these positive advancements will uphold the enthusiasm of homebuyers, encouraging them to step forward and realize their homeownership aspirations, Runwal added.

Anuj Puri, Chairman - ANAROCK Group, said as widely anticipated, the RBI has decided to keep the repo rates unchanged at 6.5%. India continues to outperform other countries in terms of consumption and with the festive season coming up, the RBI will not risk denting it.

This is nothing but good news for aspiring homebuyers on the market for a purchase in the near future. The unchanged repo rate will help maintain the momentum in housing sales - particularly in the mid and luxury segments, which did significantly well in H1 2023, he said.

As per ANAROCK Research, we saw total housing sales of approx. 2.29 lakh units across the top 7 cities in H1 2023, the highest half yearly sales in the last decade.

However, the risk of inflation continues to lurk and if it rises further, there could be some repercussions on overall sales, especially in the cost-sensitive affordable housing segment which has already been severely impacted by the pandemic over the last couple of years.

Amidst the rising cost of these properties and the cumulative 250 bps rate hikes by the RBI in the last one year and more, affordable housing buyers have taken the severest blow.

As per ANAROCK Research, homebuyers’ EMIs jumped up by 20% in the last two years. Home loan borrowers who were paying an EMI of approx. INR 22,700 in July 2021 are now paying approx. INR 27,300 - an increase of approx. INR 4,600 per month.

This 20% increase in the EMI has resulted in a jump of approx. INR 11 lakh in the overall interest component - from approx. INR 24.5 lakh interest payable in 2021 to approx. INR 35.5 lakh today. The total interest payable over a 20-year tenure is now more than the principal amount.

Pritam Chivukula – Vice President, CREDAI-MCHI and Co-Founder & Director, Tridhaatu Realty, said the RBI’s decision reiterates the government’s resolve in supporting the real estate industry with sustaining government policies. This pause in the repo rate will help in improving market sentiments which is essential, given the upcoming festive season.

This will drive housing demand, while controlling inflationary trends, he said and expressed the hope that the government to continue with industry friendly policies that will sustain housing sales. “We also look forward to the state government reducing stamp duty which will further bring relief to home buyers and boost home sales,” Chivukula said.

Prashant Khandelwal, CEO - Agami Realty, welcomed the RBIs decision to keep the repo rate unchanged as it will provide a major boost to the housing sector. By maintaining a status quo we can expect more home buyers to come forward and buy their desired home. “We look forward to continued support from the government in terms of industry friendly policies that will help sustain growth of the sector,” he said.

Rohan Khatau, Director, CCI Projects, described the RBIs decision as a good move as it will curb inflation and drive housing demand. This comes at a time when market sentiments are robust coupled with high expectations given the approaching festive season.  “We hope the government considers bringing down stamp duty rates which will have a positive impact on home buyer sentiments and bring much needed relief to the home buyer,” Khatau said.

Vivek Mohanani, MD & CEO -Ekta World, said the Indian economy has demonstrated remarkable strength and resilience in the face of global challenges. The RBI's choice to uphold the current stance for the third consecutive occasion was a predictable decision aimed at prioritizing stability. Opting for another increase in the repo rate by the RBI would not have been favourable for the real estate sector, given that home loan interest rates are already increased.

Any additional escalation in policy rates could have significantly impacted the sentiments of potential buyers and their ability to afford homes, Mohanani said. This, in turn, might have restrained the demand as well. It would be more preferable to see a further reduction in interest rates in the near future to enhance overall market confidence and create a more appealing environment for prospective home buyers, he added.

Himanshu Jain, VP - Sales, Marketing and CRM, Satellite Developers Pvt. Ltd, said considering the existing market circumstances and inflationary pressures, the move by the RBI was anticipated to steer the economy in the right direction and maintain a stable financial environment. Escalating property costs had already compounded the challenges for those looking to purchase homes.

However, the RBI's choice to abstain from another repo rate hike has provided a big respite to prospective homebuyers, Jain said. Furthermore, individuals aiming to purchase their first home often consider it as a significant investment, and this move by the RBI is expected to positively influence their decision-making process, he said.

Dr. Sachin Chopda, Managing Director -Pushpam Group, hailed the RBI decision and said it would encourage the prospective homebuyers to still close-in on their property investments. “”In the last couple of years, we have witnessed a lot of investment in real estate as it has provided the investors with more value for their money and it has also become an attractive asset class when compared to other investment options," Dr Chopda said.

Samyak Jain, Director -Siddha Group, said the RBI decision arrives amidst escalating property prices, which is already adding a huge financial burden to the end consumer.

Although the decision might not have an immediate impact on the prospective homeowners, but it does offer some stability to the real estate sector, he said. Consequently, it could potentially motivate several homebuyers who were actively in pursuit of their dream home. “We eagerly anticipate governmental involvement, possibly through the reduction of stamp duty rates, which would offer relief to homebuyers and alleviate their financial strain even more," he said.

Ashwin Chadha, CEO, India Sotheby's International Realty, said RBI’s primary objective is to curb inflation and bring it within the comfortable range of 4%. This strategic move is anticipated to provide substantial impetus to India's broader growth trajectory. There is an emerging expectation that the RBI might eventually consider a reduction in key interest rates. Once this happens it will be a much-needed breather on EMIs for home loans.

It's noteworthy that the demand for residential real estate has been robust since 2021 on the strength of the economy, jobs and growth, he said.

Mohit Jain, Managing Director, Krisumi Corporation, said differing from the U.S.A and European Central Banks, the RBI chooses to keep the Repo rate unchanged. This strategy is preferred to manage inflation and ease pressure on homebuyers.

The period following the pandemic experienced an upswing in home purchases due to pent-up demand, which has since tapered off. To ensure sustained growth, the real estate sector necessitates a stable and predictable interest environment, he said.

Vimal Nadar, Head of Research, Colliers India, said while the economic growth trajectory of India remains intact, food inflation and the consequential impact on consumer inflation remains a monitorable. The Central bank has factored in an inflation expectancy of 5.4% for FY 2023-24 in the GDP growth projection of 6.5% for the ongoing fiscal year. Notwithstanding spiralling effect of volatile global economic scenario, strong inherent fundamentals of domestic economy will continue to allay the urgency for rate cuts in near future.

RBI’s decision to keep the repo rate steady at 6.5% since February this year will continue to bring in respite for EMI dependent homebuyers. Stability in financing costs will also stand to benefit the balance sheet of real estate developers. Real estate construction activity remains buoyant and is reflected in healthy steel consumption and cement production. Stable interest rates, favourable pricing & availability of relevant supply will augur well with first time homebuyers especially in the affordable & mid segments in the upcoming festive season, he said.

Pradeep Aggarwal, Founder & Chairman, Signature Global (India) Ltd, the RBI's decision is a promising step towards easing the financial burden on prospective homebuyers. The surge in monthly EMIs observed over the past few months has considerably constrained the budgets of individuals belonging to the middle and lower-income brackets who aspire to own a home.

By maintaining a steady interest rate environment, there is a hopeful projection that these potential buyers will be encouraged to proceed with their home buying plans. This, in turn, is expected to inject a renewed sense of momentum into the affordable and mid-housing home segment, fostering a healthier real estate market and enabling more individuals to achieve their homeownership dreams, he said.

Sunil Dewali, Co-CEO, Andromeda Sales & Distribution, said “as the RBI maintains a steady stance on interest rates, our outlook is optimistic that the pivotal policy rate has found stability and may potentially decrease in the coming times”.

This bodes well for homebuyers, developers, and lenders alike. The enduring stability of EMIs, combined with the possibility of forthcoming rate reductions, is set to bolster the confidence of prospective homebuyers. Meanwhile, developers are poised to find relief, as the costs of project funding remain unaltered. This, in turn, is expected to invigorate the initiation of new projects and ignite heightened sales momentum in the upcoming festive season, he said.

Ajit Banerjee, Chief Investment Officer, Shriram Life Insurance, tAjit Banerjee, he decision of MPC in its just concluded meeting to maintain status quo on the policy rates at 6.50% and continue to retain its withdrawal of accommodation stance on a 5:1 vote was on expected lines. The Governor emphasised that retaining its withdrawal of accommodation stance is to ensure the headline inflation remains within the target of 4 per cent. There was an upward revision in the CPI Inflation forecast for FY24 at 5.4% versus previous forecast of 5.1% assuming that country would receive normal monsoon. The Q2 CPI numbers would be at elevated levels of 6.2% in view of spurt in the vegetable and pulse prices which should subside in couple of months. The GDP forecast has been retained at 6.5%.

Overall, the Governor sounded positive on the macro-economic strengths and resilience shown by the economy, fundamentals remain strong and there was no apprehension raised on the GDP growth aspects of the country. RBI has imposed Incremental CRR (ICRR) of 10 % on deposits received by banks between May 19- July 28. This is a temporary measure aimed at mopping up excess liquidity due to the return of Rs 2000 notes.

Overall, this can be construed as a dovish policy from RBI as chances of any further rate hikes seemed remote, but RBI would keep an Arjuna's eye for any adverse condition arising out of geopolitical concerns, crude oil price movements, food price movements globally or any other global uncertain event of large magnitude.

Dr. Poonam Tandon, Chief Investment Officer at IndiaFirst Life Insurance the RBI decided to maintain the "status quo" on policy rates and no change in the “withdrawal of accommodation” stance on increasing upside risks to inflation. While the global economy continues to face challenges in terms of elevated inflation, high levels of debt, tighter financial conditions, continued geopolitical tension, and extreme weather conditions, domestic economic activity is holding up well. The FY24 GDP growth estimates were kept unchanged at 6.5% with risk evenly balanced. On the other hand, RBI revised its FY24 inflation estimates upwards to 5.4% from 5.1% earlier due to vegetable price shocks. Even as core inflation is easing, the central bank stated it will remain watchful amid a spike in food prices and weather-related uncertainties while it expects a significant correction in food prices in the coming month.

It was further decided that Banks will have to maintain an additional 10% CRR on incremental liquidity due to the return of INR 2000 notes as a temporary measure and this will be reviewed in the September policy meet again. This move will tighten the near-term domestic liquidity to rein in inflationary pressures. Moreover, RBI stated to bring in more transparency in interest rate reset for EMI-based floating rate loans. The framework will require clear and proper communication on tenor, rates to customers, and other charges, and give the option to change to a fixed rate and/or foreclosure. It has also proposed conventional payments in UPI by introducing offline payments in UPI and enhancing transaction limits for small-value transactions.

Overall, the commentary was slightly more cautious, and cutting down liquidity is a hawkish bias with a focus on evolving inflation outlook.

Kishore Lodha, Chief Financial Officer, U GRO Capital said, “Thematically RBI is looking extremely cautious and concerned about inflation. RBI is targeting an inflation of 4% and as of now, it’s way above that. Though inflation is within the tolerance band of 6%, hence the RBI has decided to keep the benchmark rates unchanged

Since the withdrawal of Rs 2000 notes started, liquidity in the system has increased. To mitigate that, the RBI has temporarily increased the ICCR by 10%. However, it will be withdrawn on the 8th of September so that there is ample liquidity in the markets.

Recent increases in vegetable and food prices may take food inflation up but it seems like it is a temporary phenomenon, and it should come down shortly. Crude prices are inching up and inflation in Europe and the US remaining high may put some pressure on domestic inflation.

The RBI has guided that next year Q1 inflation would be 5.2%, hence in the next 9-12 months, rate cuts are unlikely. However, the growth forecast remains intact at 6.5%, which is the highest amongst all the large economies.

To boost infrastructure funding a lot of relaxations have been given to infrastructure debt funds and on digitalisation of economy the focus remains intact.”

Akshay Tiwari - Fundamental Analyst, Religare Broking Ltd, said the incremental CRR (I-CRR) is intended to absorb the excess liquidity arising from deposits of Rs 2,000 notes in the system. In the banking system, the I-CRR may lead to setting aside additional reserves of ~Rs 1 lakh cr. This is a temporary measure and the RBI shall assess the demand/supply of liquidity on September 8th, 2023. This measure is not expected to have much impact on the banks profitability in the long run nor do we foresee any incremental pressure on NIMs of banks due to this move. The estimated incremental reserve stands at around 1% of the bank's total credit outstanding.

Dr. Manoranjan Sharma, Chief Economist, Infomerics Ratings, said, this Policy is on expected lines. Low global growth is on because of geo-politics-high inflation, deteriorating financial conditions, Russia Ukraine war and growing economic fragmentation. The financial system is constrained by higher inflation, rising interest rates and stress in financial markets.  

In view of global cues, improved crop sowing, uneven monsoon, good industrial growth, buoyant services activity, buoyant aggregate demand conditions, rising investment activity, and 2 % CAD, real GDP growth for 2023-24 is 6.5 %

Higher food inflation in July occurred because of tomato prices and further increase in prices of cereals and pulses. Uncertainties also stem from El Niño conditions, global food prices and crude oil prices raising annual inflation projection to 5.4 %. 

Liquidity rose because of return of ₹2000 banknotes, RBI’s surplus transfer to the government, pick up in government spending and capital inflows. 

With growth in bank credit, low NPAs and adequate capital and liquidity buffers, the Indian financial sector is stable. Hence in view of the evolving macro-economy and the trade-off between growth and inflation, the RBI rightly kept the rates and stance unchanged. 

YS Chakravarti, MD & CEO, Shriram Finance, pointed out that concerns persist due to ongoing global headwinds. The upward trend in vegetable prices is anticipated to subside as the monsoon progresses favourably across India. The recent mild El Nino conditions have played a role in ensuring a non-deficit monsoon. Looking ahead, the upcoming festive season is projected to stimulate the demand for two-wheelers, commercial vehicles and the gold loan segment.

“We are not expecting any tightening due to the incremental CRR rate, hence lending rates for SMEs are likely to remain unaffected,” he said.

The Governor highlighted the encouraging demand in the tractor segment, while demand for two-wheelers lagged. Nonetheless, this trend is expected to reverse with the conclusion of the non-monsoon period.

FADA President Mr Manish Raj Singhania said, "The decision to retain the Repo Rate at 6.5%, coupled with the RBI's dedication to anchoring inflation at 4%, serves as a bolstering force for the Auto Retail Industry, which is currently on a commendable growth trajectory. As we approach the festive season, a cornerstone of India's consumer market, the consistent Repo Rate is poised to benefit the consumers significantly. Such stability in rates reinforces confidence, particularly among entry-level customers in both the passenger vehicle and two-wheeler segments. It's worth noting that the recovery in the entry-level two-wheeler segment, in particular, still lingers below pre-COVID benchmarks."

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