Real estate demand gradually seeing some green shoots
The Reserve Bank of India (RBI) has left the rates unchanged and yet delivered an extremely dovish monetary policy by taking measures to keep the risk-free rate low and providing on-tap liquidity, noted Navneet Munot, CIO, SBI Mutual Fund.
“Looking through the transient inflationary hump and supporting growth was a clear message sent out in today’s (9 Oct 2020) policy. Overall, the forward guidance was extremely favourable as there was an explicit message to keep policy accommodative at least until FY 2022,” said Munot in comments on the latest RBI decision to support the sagging economy.
The new external MPC members appear to be more dovish in their policy views. In past, they have been quite vocal on liquidity, credit market dynamics, and have advocated for the RBI to look at unconventional or untested measures.
The RBI finally came out with its expectations on growth for FY21, which is only a tad short of double-digit contraction (-9.5% for FY21).
Ever since the pandemic, the RBI had been advocating to do whatever it takes to support the economy and the financial sector. Various regulatory relaxations announced since COVID onset had been novel, not tested through time and yet very appropriate and timely.
On-tap TLTRO, the introduction of round-the-clock RTGS facility, co-origination of priority sector loans between banks and NBFC/HFCs, and measures to boost export and housing loans announced today are very encouraging.
The RBI has expressed its discomfort on any up-move in yields. Devolvement of primary auctions to PDs on select occasions and cancellation of an OMO is a testament to that. Today, the RBI raised the quantum of OMO purchase, gave explicit guidance for OMO and for the first time, stated plans to conduct OMOs for SDL as well, thereby nudging the market from all sides to invest in bonds.
“We commend RBI’s ‘Open Mouth Operations’ matched with ‘Open Market Operations’. Given the constrained fiscal situation, the government had mostly focused on reforms, while RBI has done the heavy lifting to lend liquidity in the economy,” said Munot.
Over the last few months, the central bank had been juggling through multiple objectives- of keeping the inflation low, managing rupee and bond yields – all of which almost impossible to achieve simultaneously. With inflation shooting past RBI’s comfort zone, it was understandably reluctant to inject more liquidity.
On top of that, the high Balance of Payments (BoP) situation has already lent considerable rupee liquidity in the system. So, the central bank has shied away from an explicit purchase of government papers, which raised the market’s concern amidst increased fiscal deficit. The lack of RBI buying in Q2 led to the 10-year G-sec remaining sticky around 6% since June.
Something eventually had to give, either rupee appreciates or bond yield sell-off or liquidity injected to prevent these outcomes despite high inflation. Eventually, it appears that the central bank had sided with easing the liquidity and nudge yields down.
With India experiencing a large demand shock, and fiscal space not unconstrained, it will be important to ensure the monetary easing achieved thus far is not reversed.
To that extent, the explicit OMO guidance is a welcome move.
“Our view has been that despite the higher G-sec supply this year, a little extra push from the RBI amidst low bank credit and higher private savings will enable the increased government borrowing to go through non-disruptively in this exceptional year.
“RBI’s buying will catalyze market appetite as well.
“In particular, banks are flushed with deposits While incremental bank credit FYTD has been negative of Rs.1.5 trillion,” said Munot.
Further, to the extent that the rise in inflation is supply side driven while demand and employment stay weak and to the extent it does not become more generalised, it should not pose much challenges for RBI.
In the long run, supply-side reforms should help lower inflation trajectory.
“As such, we continue to remain constructive on duration. On equities, our approach continues to be bottom-up,” he said.
The policy statement struck a confident note on the outlook for economic activity, especially the projection of a mild growth in Q4 FY2021, which appears to be coloured by the spate of positive data for September 2020, the sustainability of which is as-yet uncertain, noted ICRA Ltd.
“We remain circumspect about generalising these early green shoots, as they have benefitted from base effects and one-off shifts in some sectors,” said Aditi Nayar, Principal Economist, ICRA Ltd on RBI Monetary Policy announcement on 9 Oct 2020.
“With fresh Covid-19 infections elevated, although admittedly lower than earlier levels, we expect economic agents to adjust to a new normal, and foresee a slow grind back to the pre-covid levels in many sectors,” she said.
In ICRA assessment, inflation may not relent appreciably below 5% until December 2020, dimming hopes of a rate cut prior to the final policy meeting scheduled for this fiscal year.
The timing of future repo rate cuts has been rendered less relevant by the liquidity enhancing measures unveiled by the RBI, and the expectation of continued support going forward.
Moreover, the market will take comfort from the assurance that the Monetary Policy Committee (MPC) has decided to continue with the accommodative stance at least during the current fiscal year and into the next fiscal year, as well, in a bid to support growth.
It remains to be seen if the commitment to facilitate state and central government borrowing, as well as the explicit signals aimed at softening yields, are adequate to ensure that the bond market shrugs off concerns regarding the fiscal health of the central and state governments, as well as the large supply of state bonds that is expected in Q4 FY2021, said ICRA.
Amidst its efforts to curb inflation – currently hovering above 6% – RBI, as expected, has kept both the repo rate and reverse repo rates unchanged at 4% and 3.35% respectively while maintaining an accommodative stance, according to ANAROCK Property Consultants.
With real estate demand gradually seeing some green shoots of revival, especially in the wake of reduced stamp duty charges (in Maharashtra) and developers discounts and freebies, reduced repo rates would have given an added boost just before the upcoming festive season.
“But with consumer inflation still trending at the upper end of the apex bank’s band, and the policy repo rate also being substantially reduced by 140 basis points in 2020, today’s move was expected,” Anuj Puri, Chairman – ANAROCK Property Consultants, said on the 9 Oct 2020 RBI announcement.
On a positive note, RBI’s move to rationalize risk weightage on home loans and linking housing loans risks only to loan-to-value is a welcome move.
“This announcement thus will definitely encourage banks to lend more to individual homebuyers without feeling the stress on their balance sheets. In the current,” said Puri. #RBI #interest #banking #finance #economy #projects /fiinews.com
