RBI Governor: Interest rates to be cut by 75 bp
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RBI Governor: Interest rates to be cut by 75 bp

RBI Governor: Interest rates to be cut by 75 bp

27 Mar 2020 Long Read
Reserve Bank of India (RBI) Governor Shaktikanta Das today announced that interest rates will be cut by 75 basis points (bp) to 4.4 per cent, while the reverse repo rate will be reduced by 90 bp to 4 per cent. The announcement has been made amid the current crisis situation to mitigate the impact of the COVID-19 or Coronavirus on the economy. Das also announced several measures to inject Rs 3.74 trillion liquidity into the system.

The RBI's Monetary Policy Committee (MPC) met from March 24-27 and voted a 4:2 majority for a reduction in the repo rate to revive growth and mitigate the COVID-19 impact. The MPC noted that global economic activity has come to a near stand-still as COVID-19 related lockdowns and social distancing in affected countries. Expectations of a shallow recovery in 2020 from 2019's decade low in global growth have been dashed, said the Reserve Bank governor.

In its capacity, CW has also written an open letter to the Finance Minister Nirmala Sitharaman with recommendations to help the real estate and construction industry recover the COVID-19 crisis. Read the letter written by Pratap Padode, Editor-in-Chief, Construction World and Founder, FIRST Construction Council, to the Finance Minister here.

While the RBI governor urged banks to keep the credit flowing, the central bank has cut the cash reserve ratio or CRR of all banks by 100 bps to 3 per cent. The CRR cut will release Rs 1.37 trillion into the market. Notably, the RBI had last reduced CRR on February 2013, by 25 bp.

The governor of RBI also announced that all banks and NBFCs are being permitted to allow a 3-month moratorium on payment of instalments on term loans. The moratorium on term loans, deferment of interest payment on working capital will not classify as default or result in asset classification downgrade, he reportedly said. Das also mentioned that the Reserve Bank will undertake repo operation of up to Rs 1 trillion to infuse liquidity into market, and that the bank will continue to remain vigilant and take whatever steps are required to mitigate the impact of COVID-19.

These announcements come a day after finance minister Nirmala Sitharaman released a Rs 1.7 trillion package to combat the impact of the 21-day Coronavirus lockdown yesterday.

CW lists reactions from the industry on RBI’s moves:
Niranjan Hiranandani, President, ASSOCHAM and President, NAREDCO:
“India INC applauds the robust liquidity infusion step! Fresh liquidity of Rs 3.74 trillion injected into the system by unleashing staunch arsenal support by strong fiscal measures timely announced. In the crucial time where the Indian economy is battling the exponential contagion, fresh liquidity pumped in the system will certainly help to mitigate the stressed cash flow and debt pressure in the economic system. The RBI has rightly packaged the relief measures by amplifying all the best instruments to act as an economic troubleshooter, salvaging Indian economic slump amidst world recession.

In a much-awaited move, RBI has come up with measures to expand liquidity as it also eases banking regulations; has cut rates as also announced a moratorium of three months of EMIs on all outstanding loans. Stakeholders in the Indian economy will heave a sigh of relief, as these moves reflect measures to take on the economic crisis caused by the COVID-19 pandemic. As the RBI Governor pointed out, these moves will enhance liquidity and ensure the smooth functioning of financial institutions, while the EMI moratorium will ensure no impact on credit ratings on loan repayments. The volume of measures carried out by the apex bank to infuse liquidity amounting to Rs 3.75 trillion back in the system is robust and applauded to uplift market sentiments. This fiscal relief package in addition to the FM’s Rs 1.7 trillion relief package ensures that the government is vigilant to retrieve the nation out of economic pain and safeguard job loss.

He further emphasised that the reverse repo rate which has been cut by 90 basis points stands at 4 per cent now. This should compel banks to lend more to all the adversely hit sectors.

I echo his sentiments when he said: “Covid-19 is upon us but this too shall pass. The success of the masterstroke announcement by RBI will be in quick transmission of these liquidity tools down the line to uplift the appetite among the India INC to notch up the economic revival”.”

Anuj Puri, Chairman, Anarock Property Consultants:
“RBI’s latest announcement of a massive repo rate cut of 75 bps coupled with three months moratorium of EMIs on all outstanding loans is the biggest move that India has so far made to counter the COVID-19 fallout. The move will push credit flow into all industries reeling under the impact of the Coronavirus.

The repo rate cut will infuse cash flows into the system and ensure that consumption disruption is minimised. It will effectively benefit all sectors, including real estate.

Given this time period, RBI will ensure that the benefit of the rate cut is directly passed on to actual consumers, which could eventually translate into more home loan takers. Additionally, this move of the RBI encouraging banks to lend more and also enable industries to borrow.

The moratorium of three months of EMIs on all outstanding loans will be a major relief to all concerned stakeholders, including home loan borrowers and developers. Developers now get breathing space to get their financial act together, at least for now. Moreover, the fact that non-payment of EMIs will not cause loans to turn bad is a major relief.

All in all, this big-bang announcement by the RBI will benefit all industries in the country, and is undoubtedly the most convincing intervention yet to tame a major economic crisis in the country.”

Ramesh Nair, CEO & Country Head, JLL India:
“Purposeful action to mitigate the adverse macroeconomic impact of the pandemic! This is a very significant move with substantial monetary policy intervention at a time when COVID-19 has impacted the economy at large. This is in conjunction with economic package announced by the finance minister yesterday for the poor. In addition to other benefits, the package is expected to benefit 3.5 crore registered construction workers. This is also a perfect orchestration of the joint efforts by the Central government, state governments and the Central Bank to deal with this global health crisis.

In these unprecedented times, the 75 bps rate cut (bringing down current the repo rate to 4.4 per cent) 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 per cent. This is to ensure revival of growth, mitigate impact of covid19 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 growth of credit is slowing down. It shows the central bank’s willingness to use all the instruments at their disposal to mitigate the impact of a global pandemic on the functioning and the stability of the Indian economy and the financial sector. The injected liquidity of Rs 3.74 trillion along with the three-month moratorium on all term loans by financial institutions will alleviate short-term liquidity concerns and help developers as well as home buyers survive in these uncertain times. It is a big relief for developers and homebuyers to help them mitigate the challenges faced by them currently. It is pertinent to note that total outstanding loans of real estate developers from Commercial banks, NBFC s and HFCs is estimated to be around INR 4.5 lakh crore as of March 2020. At the same time, this moratorium will definitely benefit homebuyers as these financial institutions have lent an estimated Rs 20 trillion as of March 2020.

It is important for immediate transmission of these rate cuts to the home buyer which will boost consumer sentiment. The state governments should also take necessary steps to utilise the cumulative Rs 310 billion funds for the welfare of building & construction labourers to help those who are severely impacted by the economic disruption on the back of the lockdown.

Shishir Baijal, Chairman & Managing Director, Knight Frank India:
“Bold welcome steps by RBI! We are delighted with the Reverse Bank’s announcements, which has far exceeded the expectations of the industry. The apex bank has checked all the required boxes of rate cut, liquidity infusion and moratorium. These steps will help the economy to stay stable despite the lockdown and economic disruption.

The sharp repo rate cut of 75 bps by RBI is a step in the right direction. Sharper cut in reverse repo rate by 90 bps will compel banks to lend instead of parking surplus liquidity with the RBI. The cut in CRR by 100 bps and the TLTRO will infuse liquidity in the systems, which seems to be the crying need of the hour. The moratorium of 3 months for all term loans and deferment of interest on working capital by 3 months will be very helpful at this point when most businesses are unable to have a steady cash flow.

We are hopeful that these measures will be complemented by further fiscal stimulus measures by the Central and state governments to support demand in the economy. We welcome these measures by RBI and see this as a big relief for the economy in general and for the real estate sector which would have been one of the worst effected owing to its linkages with overall economy.”

Kamal Khetan, Chairman and Managing Director, Sunteck Realty:
“Today’s announcement by RBI compliments the government’s fiscal and compliance measures. The 75 bps cut would give big boost to demand for credit appetite among new home buyers to avail housing loan resulting in growth of real estate sector. The moratorium of 3 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.”

JC Sharma, Vice Chairman & Managing Director, Sobha:
“The timely and effective steps taken today by the RBI to mitigate the economic impact of COVID-19 and maintain financial stability in the country is highly appreciated. The RBI has announced several laudable measures including special lines of liquidity, loan moratorium, deferring of working capital interest to ease the stress in these challenging times.

We welcome these commendable steps by the RBI for reducing the Repo rate by 75 BPS and Reverse repo rate by 90 basis points to 4 per cent. This is likely to reduce EMI’s for borrowers and make new home loans cheaper. The RBI has also permitted financial institutions to allow a three-month moratorium on monthly instalments on all term loans. This much needed move in these times will hugely benefit homebuyers and the real estate sector.

The rate cut is further expected to complement other monetary measures such as the deferring of working capital interest, reduction of CRR for all banks by 100 basis points should address liquidity challenges faced by NBFCs and banks by easing investment inflows into the country. These accommodative measures will ensure that adequate liquidity is available to all constituents and COVID-19 related liquidity constraints are eased.”

Sanjay Dutt, Managing Director & CEO, Tata Realty and Infrastructure:
“The past few years have not been kind towards the residential real estate sector, as it continues to struggle under the grip of severe liquidity crisis, unsold inventory and unfinished projects. The slew of government initiatives in 2019 like setting up of Rs 250 billion stress fund and consecutive repo rate cuts gave us the optimism that the sector will gain some momentum in 2020. However, these are extraordinary times where entire world economies have come to a standstill due to the Covid-19 outbreak.

While everyone is bearing the brunt of this pandemic, it is the middle class and those who make minimum wage that have been worst hit.

Our government has taken some remarkable measures to curb this menace; the announcement of Rs 1.7 trillion relief package to help those hit the hardest by the Covid-19 lockdown is commendable. We also applaud RBI’s bold move of relaxing the repo rate by 75 basis points to 4.4 per cent, as this will lead to reduction in home loan rates/equated monthly instalments (EMIs) of borrowers, thereby taking some financial burden off them. These efforts are also bound to make the residential real estate sector more attractive for new home buyers as it will be cheaper to take new loans.

We are glad to see that the government and RBI are working together to combat the slowing GDP growth and inflation and help the real estate sector as it forms the backbone of several other sectors. These new announcements will also help lift the homebuyer sentiment, kick-starting the demand cycle for mid-range homes as well as affordable housing. With the stock market witnessing a lot of fluctuations in these times of uncertainty, we anticipate that a lot of people will consider investing in property as that is a more stable, long-term asset.”

Bijay Agarwal, Managing Director, Salarpuria Sattva Group:
“Reduced repo rate by 75 bps and deferring loan repayment for three months is definitely a welcome move by RBI and the government. This will allow commercial banks and NBFC’s including housing finance companies, ease the burden on real estate companies. However, there will not be much enhancement in the real estate market. Residential market has seen a downward trend with many of them likely to postpone the purchases. Commercial real estate as well might see some changes in the coming months.”

Rohit Gera, Managing Director, Gera Developments:
“The liquidity infusion measures as well as three-month moratorium for all debt payments is most welcome. Businesses have been struggling with no inflows and fixed outflows. The reduction in interest rates will ease the burden on individuals and businesses as would the moratorium. Once the country emerges from the lock down, we hope the government will take immediate steps to stimulate demand so that we see an economic revival in a short period of time.”

Shailesh Puranik, Managing Director, Puranik Builders:
“During such trying times, the Reserve Bank of India has been sensitive to the needs and demands to keep the Indian economy afloat. Not only has the RBI ensured to massively cut the repo rate by 75 basis points, but also lowering of Cash Reserve Ratio to 3 per cent, announcing the moratorium period on all loans among other measures will provide Indian businesses to tide over these difficult times in the next few months.”

Samir Jasuja, Managing Directpr & Founder, Propequity:
“This move is likely to bring some relief in a longer run. However, there won't be much boosting effects of the decision on the realty market as residential market is going to be hit, especially the luxury segment, and the buyers are likely to postpone their purchases for at least 6 months. Commercial real estate is also expected to come under stress and we could see some rental renegotiations going downwards in the coming quarters.”

Anurag Mathur, CEO, Savills India:
“In these trying and testing times, a resultant of the ongoing COVID-19 pandemic, the RBI has gone all out, announcing a host of measures to revive growth, mitigate the negative ramifications on the economy, preserve the stability of the entire financial ecosystem, while obviously keeping in mind the inflation levels. After the Finance Minister’s announcement of Rs 1.7 trillion package yesterday, the central bank has made some bold steps to ensure that the financial burn for individuals and businesses remains minimal. Today’s radical lowering of rates by 75 bps along with other steps – foregoing the orthodox approach – are exemplary. This is an unprecedented step by the RBI, demonstrating its ability to think strongly out-of-the-box when it needs to.”

Dr Joseph Thomas, Head of Research, Emkay Wealth Management:
“The RBI announcement is inclusive of all the possible actions from a monetary policy perspective, like the rate action to bring down policy rates directly, liquidity action to support effective transmission of lower rates to ultimate users of credit, and a number of regulatory and developmental measures. The measures have addressed all the fundamental issues in a comprehensive manner using both conventional measures like cut in the repo rate to the tune of 75 bps and the CRR cut of 100 bps, and also substantial liquidity measures, apart from actions like access to domestic banks in offshore currency NDFs. The relief given on the repayments in term loans is indeed a very timely action and would serve to remove lot of stress which a large number of borrowers may face in the coming days. This is a direct and targeted approach to the fluid situation in the face of an uncertain inflation and growth trajectory. This scaffolds the positive impact of the fiscal measures and strengthens our response to the adverse economic impact of the pandemic.”

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