25 BPS Rate Cut Tepid, More Needed To Stimulate Demand: Shishir Baijal, CMD-Knight Frank India

Repo rate
Repo rate

For the fifth time in a row this year, the Reserve Bank of India (RBI) slashed the repo rate by 25 basis points. The cumulative policy repo rate has been reduced by 110 bps during February-August 2019.

After the cut, the repo rate stands at 5.15 per cent from 5.40 per cent with immediate effect. The reverse repo rate has been reduced to 4.90 per cent and the marginal standing facility (MSF) rate and the bank rate to 5.40 per cent.

The move comes at a time when growth in gross domestic product (GDP) slumped to 5 per cent in Q1 FY20, extending a sequential deceleration to the fifth consecutive quarter. Talking about real estate and construction industry,  finished steel consumption decelerated sharply in August and cement production contracted.

The repo rate cut by RBI is getting a mixed response from the real estate sector. Here is what Mr. Shishir Baijal, Chairman & Managing Director, Knight Frank India, has to say about the rate cut. 

Shishir Baijal, Chairman and Managing Director, Knight Frank (India) Pvt. Ltd.
Shishir Baijal, Chairman and Managing Director, Knight Frank (India) Pvt. Ltd.

In light of the ongoing economic distress in the country, the 25 basis points cut in policy rate is short of expectation. While it is the fifth consecutive rate cut this year, it is insufficient to support the flagging consumer demand. The stressed real estate sector was looking up to a strong rate cut and sector specific lending provisions to improve both liquidity scenario and consumer spending ability.

As has been witnessed so far, a cumulative 110 bps REPO rate cut over the last 6 quarters has failed to stimulate consumer demand as well as private investment in the economy. A slew of factors such as slowing economic output, rising unemployment rate and low consumer confidence have hindered the percolation of these small quantum rate cuts to the economy at large.

On this backdrop, another 25 bps rate cut by Reserve Bank of India (RBI) comes as a disappointment, more so for the real estate sector. The aggravating non-banking financial company (NBFC) liquidity crisis is severely impacting credit availability for the industry, especially developers, as they struggle to raise even construction finance. Lack of liquidity stimulus will only worsen the situation further. Therefore, a substantial rate cut to reinvigorate end consumer demand and intervention on real estate sector specific lending provisions could have been a better intervention at this juncture.

The central bank and the government have taken several measures to aid the supply side in the recent past. However, it is the weak consumer sentiment and spending inability that is the fundamental problem of the current economic slump. Unless meaningful initiatives are taken to propel consumer demand, these supply side interventions may not meet the desired goal of economic revival.”

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