The recent interest rate cut of 25 bps by the Reserve Bank of India, in its first monetary policy review for the new fiscal on the heels of the newly reformed lending rate regime for faster transmission of rate cuts, together with a host of other mortgage reforms, will benefit home buyers and result in higher credit growth, thereby providing a fillip to the housing sector.
The RBI’s move of 25bps rate cut however falls below the expectations of the corporate sector, which was demanding a substantial cut of some 50 bps in order to push up demand and growth. However, taking a cue from last year’s experience, RBI took a conscious decision not to effect a 50 bps cut and create a false sense of satisfaction. Here it is worth mentioning that ever since the central government kicked in this lower interest rate cycle since January 2015, it has effected five cuts (including the recent one) with a cumulative rate cut of 150 bps, but not even half of the 125 bps cut undertaken last year has been transmitted.
In this context, RBI Governor Raghuram Rajan has categorically said that the central bank did not want to effect higher rate cuts at a time when there is an overhang of transmission, and instead wanted past cuts passed through first so that further rate cuts happen without overhang.
But then, this recent rate cut that follows the 2016-17 budget, restricting fiscal deficit to 3.5 percent of GDP to make way for more and cheaper funds to private sector, is no routine cut. It comes with a slew of reforms that bode well for the housing sector. Before initiating the cut, RBI has on April 1, introduced a new lending regime aimed at ensuring that EMIs are in line with RBI’s key rates, helping banks quickly pass on RBI’s repo rate cut. The RBI brought in the new MCLR concept, taking into consideration only marginal cost of funds raised by banks, replacing the earlier system that was inefficient in transmitting the rate cut. Under the new rules, banks will need to adjust their lending rates every month.
Lack of liquidity has been hampering banks’ ability to transmit RBI’s rate cuts into lower lending rates. To reverse this situation, RBI has lowered the minimum daily cash reserve ratio (CRR) from 95 to 90 percent, clearly reflecting its accommodating stance in the event of banks facing short-term liquidity mismatch, leading to greater liquidity in the banking system.
The new liquidity framework will ensure banks have a leeway to manage their liquidity and lower lending rates, especially as they can now borrow for short term requirements under LAF (Liquidity Adjustment Facility) by paying lower additional interest, over and above the repo rate. A significant highlight of the newly introduced MCLR system is that it will ensure that not just the current, but even the past rate cuts get transmitted. That’s precisely why after the introduction of MCLR regime and even before the announcement of 25 bps rate cut, a couple of big commercial banks cut lending rates by 10 bps. Bankers expect further lowering of lending rates at least by 25 bps in a month or two , though fresh provisioning of NPA, at the time of announcement of fourth quarter results may pose some hurdles.
Considering that future rate cuts by RBI will depend upon a number of factors including consumer price index based inflation, monsoon, liquidity scenario and global economic environment, and considering the central bank’s insistence on ensuring transmission of old repo rate cuts before initiating a new cut, it seems unlikely that there will be another repo rate cut by RBI in its next bimonthly policy review in June.
However, the new MCLR based lending regime and new liquidity framework, together with a host of other recent reforms, hold promise for better credit flow. The National Housing Bank (NHB), has changed its eligibility criteria for refinance, enabling more housing finance companies to avail refinance from it. The government is also considering a proposal to allow Employees Provident Fund (EPFO) to deploy 15 percent funds towards housing finance companies to boost credit flow.
The government through the budget has also taken reform measures like increasing the time limit from 3 to 5 years to complete housing projects in order to facilitate home buyers to avail tax reduction of INR. 2 lakh on interest paid on home loan, and giving additional yearly rebate of INR. 50,000 on home loan interest for affordable homes to first time home buyers. This has been done with a view to boost home buying. And with the supply of durable liquidity through all the mortgage reforms, more funds will also get freed up for credit take-off for individual home loan borrowers and companies, resulting in positive cumulative effect for housing push.
The government through the budget has also taken reform measures like increasing the time limit from 3 to 5 years to complete housing projects in order to facilitate home buyers to avail tax reduction of INR. 2 lakh on interest paid on home loan, and giving additional yearly rebate of INR. 50,000 on home loan interest for affordable homes to first time home buyers. This has been done with a view to boost home buying. And with the supply of durable liquidity through all the mortgage reforms, more funds will also get freed up for credit take-off for individual home loan borrowers and companies, resulting in positive cumulative effect for housing push.