Repo Rate Unchanged: Infrastructure and construction sector continued to show solid growth says MPC

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By Rohit Sharma


The Reserve Bank of India in its fourth bi-monthly statement, issued on October 5, on the basis of an assessment of the current and evolving macroeconomic situation at its meeting, decided to keep the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 6.5 per cent.

Consequently, the reverse repo rate under the LAF remains at 6.25 per cent, and the marginal standing facility (MSF) rate and the Bank Rate at 6.75 per cent.

Regarding the policy repo rate, 5 members voted in favour of keeping the policy repo rate unchanged. Dr. Chetan Ghate voted for an increase in the policy rate by 25 bps.

According to Rohit Poddar, Managing Director Poddar Housing and Development Ltd, “The rates remain unchanged and which has opened a great opportunity for buyers. As the festive season is also round the corner and property rates are fairly low across the country, it will trigger the home buying sentiment in the market. Also, the rupee has depreciated to its all-time low to 74 against the dollar should attract NRI property buyers”.

The MPC (Monetary Policy Committee) statement of keeping the rates unchanged has come as a pleasant surprise to everyone since there was a consequent hike during the last two meetings. Regardless of the rising interest in the US, and other macro economical issues in India, RBI has not hiked the interest rates. The reason due to which the repo rate didn’t increase is because of the very sharp depreciation in rupee, inflated crude oil prices and a very high current account deficit coupled with liquidity issues This pause on the repo rate is a temporary relief and is not a burden for the home buyers especially during this festive season, Parth Mehta, Managing Director, Paradigm Realty, said.

The GDP growth projection for 2018-19 is retained at 7.4 per cent as in the August resolution. The projections of inflation for 2018-19 and Q1:2019-20 have been revised downwards from the August resolution.

The RBI’s statement said, “The infrastructure and construction sector continued to show solid growth. The output of eight core industries growth remained strong in July, driven by coal, petroleum refinery products, steel and cement, but moderated in August.” Capacity utilisation (CU) declined from 75.2 per cent in Q4:2017-18 to 73.8 per cent in Q1:2018-19, while seasonally adjusted CU increased by 1.8 percentage points to the long-term average of 74.9 per cent, further added.

The MPC notes that global headwinds in the form of escalating trade tensions, volatile and rising oil prices, and tightening of global financial conditions pose substantial risks to the growth and inflation outlook. It is, therefore, imperative to further strengthen domestic macroeconomic fundamentals, it said.

“The Reserve Bank of India’s MPC was expected to hike rates in its latest monetary review, given the impact of petroleum prices as also rupee value in the global currency market. Instead, it sprang a surprise and maintained ‘status quo’. The banking sector, like it, has done just before the past two reviews, hiked interest rates. The RBI didn’t. This has real estate wondering whether it is just a bit of bother – or are we looking at an incomplete picture, and can expect to see something new in the coming days. Home loan rates remain untouched – in theory, as per the RBI’s stance. A section of banks have a day before the RBI announcement, hiked interest rates. So, will we see them reversing the latest hike – or, will we see something akin to the RBI announcing a hike in rates? The jury’s out on this, we will wait and watch.” Dr. Niranjan Hiranandani President, NAREDCO said.

RBI said in a statement that since the last MPC meeting in August 2018, global economic activity has remained resilient in spite of ongoing trade tensions but is becoming uneven and the outlook is clouded by several uncertainties. Among advanced economies (AEs), the United States (US) economy appeared to have sustained pace in Q3:2018 as reflected in strong retail sales and robust industrial activity. In the Euro area, economic activity remained subdued due to overall weak economic sentiment, weighed down mainly by political uncertainty. The Japanese economy has so far maintained the momentum of the previous quarter, buoyed by recovering industrial production and strong business optimism.

Regarding the stance, 5 members voted in favour of changing the stance to calibrated tightening. Dr. Ravindra H. Dholakia voted to keep the neutral stance unchanged.

“After hiking the repo rate twice in a row, this is a well-thought-out move by the RBI of holding the repo rate. By keeping the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 6.5 per cent this has given a big relief to the developers as well as consumers. With the festival season coming in, this move will attract more home buyers as the interest rates on a home loan will remain unchanged and it won’t have any impact on the real estate sector. This will result in a win-win situation for both developers and buyers”, Manju Yagnik, Vice Chairperson, Nahar Group said.

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