It has not been an easy task for the Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) to decide on what should be the optimum repo rate trajectory at this point of time. RBI has had to contend with a number of global and domestic risks playing out during such a short period. High oil prices, trade wars, rupee depreciating to new lows versus the dollar, inflationary expectations and liquidity conditions were all at play before deciding the policy on Friday.
With so much noise, I would like to commend the MPC for adhering to its core objective of achieving their medium-term inflation target of 4% while supporting growth. The MPC did not increase the repo rate (which was expected by the market) as it rightly focussed on India’s growth momentum. In successive monetary policy statements, RBI has said that there are various indicators that suggest that economic activity continues to be strong despite the risks. Due to larger FDI inflows, increased financial resources to the corporate sector and strong private consumption, RBI has retained its GDP forecast of 7.4% for 2018-19 and India continues to be among the fastest growing major economies.
Further, in the first quarter of the current financial year, India grew at an impressive 8.2% of the GDP. Strong growth in manufacturing, construction and the agricultural sectors have propelled the economy to its best performance in two years. These trends indicate that India is on the cusp of a revival in the investment cycle. Green shoots are visible in sectors such as steel, cement, roads and logistics. Capacity utilisation is up from 71% in 2016 to over 75% currently.
RBI has alluded that growth remains a priority. Increasing the interest rates would have had an effect on the input costs and eventually have an adverse impact on exports, which have been growing in double digits in July and August 2018. Exports are offsetting the higher oil import bill (We must realise that oil prices are not in RBI’s control.).
While the weakness in the rupee is a cause of concern, one has to consider that the sharp depreciation was primarily due to the global contagion effects which impacted all emerging economies, not just India alone. I am sure that RBI took cognisance of the fact that increasing interest rates to control the currency has not been successful when it was implemented by other central banks.
The liquidity conditions have been tight for a while, part of which has been the reason for the stock markets turning volatile. In response, RBI has stepped up its liquidity infusion programme by recently conducting two open market purchase operations. I would like to point out that one should avoid panic selling due to incomplete or unverified information.
Global investors are aware that India remains a compelling investment story. The strong domestic demand (RBI says the growth in air passenger traffic, which is an indicator of urban demand, remains robust.), improved job opportunities and rising aspirations puts India in a unique and advantageous position. Some of the key reforms are playing out with the Goods and Services Tax (GST) stabilizing, many states have established the Real Estate (Regulation and Development) Act, 2016, or RERA, and the Insolvency and Bankruptcy Code.
As regards the housing and real estate sector, movement of interest rates has a minimal impact on housing finance companies as the demand for housing in India is immense and insatiable. India has favourable demographics, with 66% of its population being under the age of 35 years. Younger people want to buy their own homes and unlike the previous generation, they are not debt averse. India’s middle class is estimated to rise rapidly from 250 million individuals currently to 800 million by 2030. Together, these two factors are fuelling consumption and driving growth. Structural demand for housing in India will always be strong because of a variety of factors such as improved affordability, under penetration of housing finance, increased government focus on affordable housing; favourable demographics, increasing urbanization and rising aspirations.
Keki Mistry is vice chairman and chief executive, HDFC Ltd.