The central bank has kept the repo rate unchanged at 5.15% and maintained its accommodative stance in the backdrop of relatively high inflation levels and recent fiscal measures. The recently announced Budget, which focusses on improving rural incomes and increased spending on infrastructure, is expected to reflect in the next few quarters. The real estate sector showed resilience with the residential sector across the top seven cities recording a growth of 6% y-o-y in the number of units sold in 2019, in spite of muted consumption trends. Moreover, the Government’s focus on affordable housing through a slew of measures like extension of tax holiday and the benefit under section 80 EEA is expected to have an over-arching impact on the homebuyer sentiment.
The real estate sector has been in particular benefitting from rate cuts which were transmitted to some extent through mortgage rates and repo linked loans to end consumers. This was reflected in the 6% y-o-y growth in residential sales in 2019. Moreover, the recently announced extension of benefits to both developers and home buyers for affordable housing in the Union Budget is expected to maintain the growth momentum in the sector. The RBI’s move today to ease rules for projects delayed for reasons beyond the control of promoters by one year will provide the much needed elbow room for developers.
The repo rate breached the 10-year low mark in October, 2019 at 5.15%. The past trends indicate that further rate cuts would have been ineffective in reviving growth. The revival of economic growth depends on the balance between fiscal and monetary policies which weigh on the consumer sentiment.
Although the inflation has breached the target levels, it has been a supply driven trend and is expected to stabilize in next few quarters. Moreover, there are early signals of economy getting back on track as suggested by the improving manufacturing and services Purchasing Manager’s Index, core sector and Index of Industrial Production. Hence, it was a prudent step to wait and watch by holding the repo rate constant.
Decline in GDP despite reduction in repo rates and inflation levels
RBI’s decision to maintain repo rates is driven by the fact that inflation has been rising continuously in the past few months and reached 7.35% which is the highest since August 2014. Although the overshooting was on the back of volatility in food prices, the mandate to keep inflation in the target zone could be at risk if the RBI resorted to further easing of repo rates. Moreover, the food prices have been softening and are expected to stabilize in the next few months.
