The Indian economy is currently facing a slowdown not seen in 6 years. The country needs strong policy reforms to tackle the slowdown, which seems to be a mix of structural & cyclical factors. Structural factors are those that affect the economy in ways that can be permanent, like changes in demand for steel, cement, etc. while some cyclical factors are slowdown in demand for certain products or services like demand for automobiles, clothing, etc . While GDP growth for the April-June quarter slumped to a low of 5% on weak consumer demand, economists hope that demand will pick up once this festive season gets started in full swing.
The government has been taking short-term & long-term measures to help the cause, one of which is the 5th consecutive repo rate cut in the fourth bi-monthly monetary policy of 2019-2020 that happened in October this year. The cumulative Repo Rate cuts in the year 2019 come to 135bps (Basis points). Reserve Bank of India announced a 25bps reduction in the repo rate, bringing it to a record low of 5.15% from the previous rate of 5.40% The shift is most likely to push demand in the key sectors of the economy like the construction & real estate sectors.
The RBI is comfortable with the current policy of rate cuts since the CPI (Consumer Price Inflation) has been below its mandate, consistently for several quarters. It is expected that they will continue to cut rates in their next few policy meetings.
|Date||Repo Rate||Reverse Repo Rate||CRR||SLR|
|Sept 2015||6.75||5.75||No Change||No Change|
|Jun 2015||7.25||6.25||No Change||No Change|
Table of Repo Rate cuts since Jan 2015. * Source – Proptiger
Impact On Real Estate & Construction
The cuts in Repo Rate mean lowered interest rates for the consumers, which in turn mean reduced loan rates & more buyers.
The effect can be summarized in the following points:
- Reduction in the rate of borrowing for real estate companies
- Reduction in the rate of borrowing for home buyers
- Increased investments in real estate
- Boost for affordable housing
To accelerate activity in the sector, the government raised the tax deduction limit on Home Loan interest rates to INR 3.5 Lakh a year on housing units that go up to INR 45 Lakhs during the budget FY20. Homebuyers are expected to buy more under the PMAY scheme.
What’s next for the real estate sector?
RBI has announced 5 repo rate cuts this year, but this one is special. With all the initiatives & measures the government is taking to get past the economic slump, this one is likely to have the most impact on the demand because of its crucial timing. The repo rate this time has collided with the festive season, where buying is seen to be at a peak. The government would like to monitor the impact of this period to understand if the festive season helps increase the rate of buying & borrowing for consumers & developers in the next few quarters. The data and projections from independent economists and media outlets is hopeful that the cycle will pick up steam in 2020.