The RBI has reduced policy rates by 110 basis points this year in its effort to boost aggregate demand and reinvigorate private investment activity in the Indian economy. However, its impact has been muted as banks have been reluctant to pass on these lower rates to prospective borrowers, in their pursuit of higher profits and building a cushion for growing NPAs.
Twice, the central bank has undertaken significant rate cuts of 100 or more basis points in a short period to spur growth and infuse liquidity in the economy since 2015. The REPO rate was brought down by 125 bps in the period from March 2015 to April 2016, while it took till February 2017 to achieve a similar reduction in the weighted average lending rates of all scheduled commercial banks (SCB), a 10-month delay in the transmission of policy rate cuts to the final borrower. The second instance during February–June 2019 when the REPO rate was cut by a cumulative 75 basis points hasonly resulted in an approximate 11 bps drop in the banks’ WALR during the same period.The effect of the RBI’s accommodative stance to infuse liquidity in the economy by reducing rates is thus subdued to a large extent as its rate cuts do not have the intended impact on eventual borrowing costs.
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REPO rate vs weighted average lending rates for fresh sanctioned loans of scheduled commercial banks
Source: RBI
Currently, the SCBs benchmark their lending rates to the Marginal Cost of Funds Based Lending Rate (MCLR), which is dependent on externalitiessuch as the slowing economy and stressed loan book that render it relatively inflexible and reduces the scope of transmission of rate changes via this channel. The RBI aims to link lending ratesto an external benchmark such as the REPO rate so that it can directly impact the rates that the end customer receives. The State Bank of India (SBI) has already taken the lead and its repo-linked home loan will be available at 8.05 per cent from September this year. Other banks will be forced to toe the line to remain competitive.
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Shifting the benchmark and reducing borrowing costs will improve the transmission of rate cuts from the apex bank to the borrower and will definitely play a positive role in supporting residential real estate demand. However, the real estate sector has its own specific issues to contend with. While supply side concerns such as the lack of credibility and transparency have been largely addressed with the introduction of RERA, the Benami transactions act and the implementation of the GST regime, the underlying demand for residential property remains subdued.However, while recent trends suggest the beginnings of a recovery in market volumes,itis still a long road towards the resurrection of the residential market that is also affected by macro concerns of economic growth that automobile and other consumer sectors are facing today.
The author is Chairman and Managing Director, Knight Frank India
