Oct, 04, 2016: The policy rates have been reduced by 25 basis points to 6.25%. This
rate cut delivery has happened for the second time in the current
financial year, although after one round of rate cut in April, the
current one is delivered after no change in the June and August
policies. This shows that the central bank remains cautious in its
monetary policies and is carefully monitoring the overall economic
scenario before taking steps.
The first question that arises after this rate cut is, of course, how
it will help improve buyer sentiment in the housing sector. The reason
why housing sales have been sluggish is because of trust deficit
between consumers and developers. Unless RERA and other pro-consumer
policies come into play, buyers will continue to be wary. Therefore,
we can expect only a marginal improvement in sentiment on the back of
this rate cut. At this point, there is also no ready answer to the
question of to what extent banks will actually pass on the benefit of
the rate cut to borrowers.
From a larger viewpoint – globally, risk to inflation is on the upside
as rising global liquidity could result in firming up of commodity and
fuel prices, especially at a time when OPEC is contemplating a cut in
oil production to cap further fall in crude prices.
On the domestic front from the food inflation perspective, conditions
remain benign owing to good monsoons (at only 3% below the long-period
average rainfall, this year’s rainfall was normal). However, there
is marginal upside risk that could come from higher pay owing to
effects of the 7th pay commission’s revisions as well as the
expected rise in rural demand owing to good food grain production. It
may be construed that lowering of rates going forward will, therefore,
depend on such upside risks mitigating to a great extent.
For the construction sector, great relief is expected as steel and
cement production has been robust as seen from latest industry
production data. Therefore, rising cost pressure which haunted
developers earlier may not be a major issue in the near-term.
The effects of the 7th pay commission revision on house rents is
something which needs to be monitored further in order to ascertain
its impact on the housing rents.
A further rate cut, the low-cost pressures on the construction
industry and gradual revival of sentiments augur well for the real
estate sector. However, for sentiments to witness a turnaround,
stakeholders would continue to expect a sustained strengthening of the
economic situation. RBI’s expectation of a 7.6% growth in the gross
value addition is a positive one.
