Following the footsteps of global banks, the Reserve Bank of India did a massive cut in policy rates to stave off the COVID-19 induced recessionary trends in the economy. 99acres.com dissects the announcements and analyses the possible effects.
After a series of policy measures announced by the Finance Minister to handhold the economy, the Reserve Bank of India took extraordinary measures and cut Repurchase Options (REPO) rate by 0.75 percent. The rate cut intervention by the RBI will infuse the much-needed liquidity into the market and lower the cost of borrowing. It is pertinent to mention here that the Monetary Policy Committee (MPC) meeting was earlier scheduled from March 31 to April 3, 2020. However, looking at the deteriorating economic situation amid the crashing stock market, it was preponed to March 25-27, 2020.
Dr Navin Kumar, Founder, Chairman and Managing Director of Navin’s talks to 99acres.com exclusively and shares his opinion on the impact of COVID-19 on the home loan interest rates and buying capacity of homebuyers.
Let us examine the changes in greater detail.
The Reserve Bank of India has cut the major policy rates, and the changes are as follows-
- The benchmark policy rate, i.e. Repo rate, has been reduced by 75 basis points (0.75 percent). The effective Repo rate stands at 4.4 percent, down from 5.5 percent earlier. This reduction is even higher than the cut in times of global financial crisis in 2009 (4.75 percent).
- The Reverse Repo rate has been reduced by 90 basis points. It stands at four percent now. It has been done in a bid to maintain financial stability and revive growth.
- The Cash Reserve Ratio (CRR) has been reduced by 100 basis points (one percent). After the reduction, CRR is at three percent (earlier four percent) of the Net time and Demand Liabilities (NDTL) for a period of one year.
- The Central bank has urged the banking institutions to defer taking Equated Monthly Installments (EMIs) of all term loans which were due as on March 1, 2020, for a period of three months. The appeal comes at a time when the economy is facing severe demand slowdown.
- The RBI Governor conceded the fact that the overall outlook looks uncertain and the growth in upcoming months will depend on how India fights the Coronavirus menace.
The positive effects
At a time when the country is facing force shutdown, the policy measures have come as a breather. The announcement will possibly have the following effects on the economy.
- The reduction in Repo rate will lower the cost of borrowing, and the loans will become cheaper. The reduction in Repo rate is expected to inject Rs 3.75 lakh crore in the economy. In the times of crisis, it will be a huge liquidity support for the country. The real estate sector is expected to gain from this support.
- The slashing of Reverse repo rate will discourage banks from keeping the money with the RBI and will leave them with greater assets to disburse as loans.
- The reduced requirement of CRR will leave banks with more liquidity, which in turn will be forwarded as credit.
- The appeal to defer the EMIs for at least three months will ease the already strained business community, especially the real estate borrowers.
In the backdrop of policy measures announced by the Finance Minister on March 26, 2020, the massive rate cut by the RBI will ease the liquidity crunch and help economy sail through the tough times.
Hailing the move, Ramesh Nair, CEO and Country Head, JLL India, says, “In these unprecedented times, the 75 bps rate cut (bringing down the current repo rate to 4.4 percent) combined with a reduction of 90 bps in reverse repo rate and other measures to infuse liquidity into the system is a welcome move. The Repo rate reduction has even breached the 2009-level mark when the economy was hit by the global financial crisis, and the policy rate fell to 4.75 percent. This is to ensure the revival of growth, mitigate the impact of COVID-19 while containing inflation. The reduction in reverse repo rate will encourage banks to resort to enhanced lending to productive sectors of the economy at a time when the growth of credit is slowing down”.
Conclusively, the handholding measures announced by the RBI are unprecedented and much-awaited. In times when the country is facing a dangerous infection of uncertain nature, the policy measures by the Central bank and the Government are a step in the right direction. Close monitoring of the situation and policy, as well as administrative measures on a war footing, is the need of the hour.
Here’s what are other real estate industry experts saying about this move-
Surendra Hiranandani, Chairman and Managing Director, House of Hiranandani
The RBI has announced massive liquidity boosting measures including cuts in repo rate, reverse repo rate and CRR and its promise to 'do whatever it takes' has come well. The Governor has also hinted about using unconventional methods if needed. The cut in cash reserve ratio together with the above measures will inject greater liquidity into the market and there won’t be a shortage of cash flow in the economy. However, quick transmission will be key to the huge liquidity infused by RBI. All these measures will help the economy during such trying times. These new bold set of measures by RBI comes just a day after FM Nirmala Sitharaman announced a Rs 1.7 lakh crore relief package for the poor and extension of statutory and regulatory compliances in the wake of COVID-19. We also hope that the recent announcement made by our honourable Prime Minister Narendra Modi to set up a task force under FM will take all the necessary actions in the near future for the betterment of the overall economy.
Avneesh Sood, Director, Eros Group
Given the ongoing crisis in the wake of the coronavirus pandemic, with both the consumption and investment engines wavering, RBI Repo rate cut by 75 basis point is an encouraging move to stimulate the economy. Additional money available in banks at a lower cost will result in more purchasing power as there will be a lower EMI burden on the buyers. It will also reduce the liquidity crunch and lower the cost of finance for the developers. We hope that banks pass on the benefit to homebuyers and also expect this initiative to increase credit growth and recover the inactive nature of the economy and make it more convenient for homebuyers to purchase their dream home once the COVID-19 crisis gets over.
Anuj Khetan, Director, Vijay Khetan Group
The struggling real estate sector and the home buyers trapped in COVID - 19 worries, have been relieved a bit with the RBI's measures. While the repo, reverse repo and CRR cuts would increase lending powers of the banks to the businesses, a suggested moratorium of home loan instalments and interests thereon, which the banks should implement with immediate effect, will ease people from financial burdens. It will support business continuity plans, as well, because more liquidity will help the homebuyers schedule their buying plans in the short run.
Rohit Poddar, Managing Director, Poddar Housing and Development Ltd. and Joint Secretary, NAREDCO Maharashtra
We welcome these measures as without them the economy will go into deflation. I hope that the quantum of relief and duration will be reassessed every fortnight in these difficult times and a total of 10percent of GDP liquidity injection may need to be done to tide us over these unprecedented times.
Satish Magar, President, CREDAI National
Reduction in repo rate, additional liquidity of about Rs. 3.74 lakh crore induced reduction in CRR, Long Term Repo Operations and enhancement of Marginal Standing Facility and the moratorium of three months on payment of instalments in respect of all term loans outstanding as on March 1, 2020 are all timely and well-intentioned measures by RBI to address the financial stress owing to COVID-19. We sincerely hope for their quick implementation by the Banks and NBFCs.
Ashish Bhutani, CEO, Bhutani Infra
Last time, such a massive cut in policy rates and liquidity infusion was announced during the financial crisis of 2008. This indicates the kind of disruption that COVID-19 has brought. In this context, all measures that RBI has announced were warranted and we welcome the RBI move. From the reduction of policy rates to the infusion of liquidity to a moratorium on loans, all the measures will help both individuals and organisations to cope up with the volatile situation.
Ashish R. Puravankara, MD, Puravankara Ltd
It is truly heartening to see the Government is thinking of everyone at this point - from the common man to the industries! And the timing of the RBI MPC announcement couldn’t have been better, as it promises a comprehensive package to address the multiple economic challenges faced by the country. The apex body has offered a much-needed relief to a large spectrum of sectors starting from financial services to corporate houses, MSME but more importantly to the common man, by deferring the imminent burden of loans and interest payments. Ultimately, when all this is over, the onus is on all of us together, to ensure we come out strong and make our economy bounce back.
Amit Modi, President-Elect CREDAI Western UP and Director ABA Corp
RBI’s fresh announcements will provide relief to several Indians who are bound to sit at home in the wake of the novel coronavirus outbreak, but first all the banks need to make sure that there is a quick transmission of the announced rate cuts to the end consumer, else the whole effort will be futile. We also wholeheartedly welcome the three-month moratorium on EMIs and this should be applicable right away to bring relief to millions of homebuyers across the nation. We feel that RBI and the Government should proactively make sure that these benefits reach the end consumer, especially now that there is a 100 basis points cut in the cash reserve ratio to ensure sufficient liquidity in the system.
Rajan Bendelkar, President, Western Region, NAREDCO, and Director of Raunak Group
The RBI's much-needed liquidity infusion of Rs 3.74 Lakh crore into the economy comes as a big relief for the country, markets and the people who are battling a COVID - 19 war in already prevailing recessionary conditions. The repo rate, reverse repo rate and CRR cuts would extend more lending powers to the banks. It's an attempt to ensure financial stability and confidence that the financial markets needed. A moratorium of three months on repayment of loans and interest thereon, with a further assurance of not classifying such assets for downgrading, will give relief to the homebuyers and businesses. It will ease them from financial burdens and help them plan financial priorities better in this challenging time. The RBI has also assured that the banking system was sound and there was no need to worry about it. But, all this has highlighted a fact that the real estate is a safe asset class, as it is a material one. This is evident when cash flows and liquidity have impacted all other asset classes severely.
Vikas Garg, Deputy Managing Director, MRG World
After cutting policy rates five times in the past one year, the RBI had been on a pause since December in view of high inflation. Banks should consider real estate as the priority sector as this sector along with its allied sectors/industries contributes significantly to the GDP. Homebuyers should also get relief from the banks in the form of reduced EMIs which will bring in a situation prevalent in 2003-04 when rates were around 7 percent. If buyers will get such a rate, then the real estate sector might see another boom, which will be good for the overall health of the economy.
Mohit Goel, CEO, Omaxe Ltd.
While the RBI’s move involving cut in the Repo, Reverse Repo, CRR and SLR and thereby the infusion of abundant liquidity are need of the hour, it’s now time for banks to rise to the occasion and pass on the benefits at the earliest before the negative triggers come into play. The moratorium on all loans and deferment of interest on all loans including working capital, home and car loan EMIs are appreciable moves, we expect far-reaching benefits for all sectors in the times to come as RBI continues to monitor the situation closely.
Vijay Verma, CEO Sunworld Group
After the announcement made by the RBI Governor, it is up to the individual banks to pass on the benefit. It should not happen like earlier repo rate cut announcement where nothing was given to the home loan seekers. If we want to see the growth of real estate sector, which contributes significantly towards the GDP, then EMIs have to be reduced and the latest announcement has definitely given that opportunity to individual banks. Another important aspect is the increase in liquidity as the reverse repo rate has been cut by 90 basis points. Banks should use part of this money to infuse liquidity in the real estate sector and consider it as RBI Governor has stressed upon the need to keep the credit flowing to the stressed areas of the economy.
Parveen Aggarwal, Chairman and Founder, Signature Sattva
Reduction in Repo rate, Reverse Repo and CRR along with other measures of infusing liquidity in the system was extremely important, and RBI has pressed the right button. Equally important is the moratorium of 3-month, which RBI has provided on all term loans, including home loans. This will help individuals immensely.
L.C. Mittal, Director, Motia Group
Like every other industry or sector, real estate needs liquidity, and with the latest announcement by the RBI Governor, we are hopeful that banks will consider providing loans to the sector. We have to understand that the sector contributes significantly to the GDP and contribute in a major way towards the economic growth of the country. In the present situation, the sector should not be left behind as any ill-effect on real estate will have a negative impact on the overall growth.
Bijay Agarwal, MD, Salarpuria Sattva Group
Reduced Repo Rate by 75 bps and deferring loan repayment for three months is definitely a welcome move by the RBI and the Government. This will allow commercial banks and NBFC’s along with housing finance companies, ease the burden on real estate companies. However, there will not be much enhancement in the real estate market. The residential market has seen a downward trend with many of them likely to postpone the purchases. Commercial real estate might also see some changes in the coming months.
Sakshee Katiyal, CEO, Home and Soul
RBI’s step of increasing liquidity and decreasing the repo rate and CRR will help increase liquidity on the one hand and also give stability to the bankers. Some private banks were in trouble and making up their CRR through the wholesale market. This has definitely given booster dose to the system and has been able to reduce panic.
Though there are no loan takers right now but existing loans will get benefit and post quarantine, this will definitely favour businesses. Moratorium on loan EMI, on the one hand, has helped the people to maintain liquidity but is negative for banking profitability. Though this will fuel in consumption which is beneficial for the industry post lock down. The guidance given for the future was also very handy and promising when the Governor says that they are open to exploring all conventional and unconventional methods for handling this time of emergency and panic.
Lincoln Bennet Rodrigues, Founder and Chairman, Bennet and Bernard Group
The giant steps announced by RBI today to safeguard our economy is highly appreciative and will improve liquidity, reduce the cost of funds and will help businesses across sectors. The sharp cuts in the Repo and Reverse repo rates are in tune with announcements by Central Banks across the world, to mitigate the impact of the Coronavirus. The three-month moratorium on payments of term loan instalments (EMI) and interest on working capital will give much-desired relief for individuals and now it needs quick transmission for maximum impact. This will reduce the borrowing cost for the home-seeker significantly and have a positive impact on real estate. Banks should do all they can to keep credit flowing now. All these progressive and timely measures will push up the demand curve in the economy and keep the consumption cycle on. The assurance by RBI governor that further steps will be taken down the road, if problems persist is also noteworthy. Overall, the measures will give a boost to the macroeconomy and ensure financial stability.
Kamal Khetan, Chairman and Managing Director, Sunteck Realty Ltd
The latest announcement by the RBI complements the Government’s fiscal and compliance measures. The 75 bps cut would give a big boost to the demand for credit appetite among new home buyers to avail housing loan resulting in the growth of real estate sector. The moratorium of three months on the term loans, including home loans by RBI would provide relief for the real estate sector to focus more on the operational requirement and recalibrate the business strategies. The relief would improve cash flow and prevent further downslide from hereon. It indicates the willingness of the policymakers to ensure liquidity in the system. We hope these steps would ensure timely monetary transmission to those affected.
Kaushal Agarwal, Chairman, Director, The Guardians Real Estate Advisory
The steep cut in the Repo and reverse repo rates by 75 and 90 basis points is in-line with announcements made by Central Banks across the world, to mitigate the impact of the Coronavirus. The 3-month moratorium for borrowers is a huge relief for individuals. At a time when there is a looming concern of the economy slipping into a recession, the announcements by the finance minister and the RBI depicts the responsiveness of the Government. The relatively higher reduction in the Reverse Repo and the CRR is bound to push banks to look at increased lending, thereby ensuring attractive lending rates. We believe that with the Repo rate at 4.40 percent, the banks will finally be passing the benefits of the current and previous rate cuts to the customers. This will reduce the borrowing cost for the home-seeker significantly and have a positive impact on the real estate sector. The commitment by the RBI Governor to tackle the evolving situation by making use of the many arsenals at its disposal is very reassuring.
Piyush Baranwal, Senior Fund Manager Fixed Income, YES Asset Management (India) Limited
Overall, today’s policy announcements have covered a lot of ground to ease the stress that had started building up in the Indian financial system. It ticks most boxes in terms of expectations that had been emanating from various segments of the economy which will no doubt be hit hard due to prolonged lockdown. The issue of ample systemic liquidity but capital-starved borrowers will partly be addressed by Rs one lakh crore of TLTROs as this money has to be compulsorily lent to investment grade NCDs and CPs which have also been provided additional HTM benefit. The mandate of using this window for both primary and secondary market securities at once provides much-needed money to corporate borrowers as well as investors in need of liquidity such as NBFCs and MFs.