What does RBI’s MPC meet outcome spell for banking and housing loan sectors?

At the Reserve Bank of India (RBI) Monetary Policy Committee (MPC) meeting on December 08, 2023, the RBI Governor Shaktikanta Das announced the MPC’s decision to maintain the repo rate at 6.5 per cent. After a three-day bi-monthly meeting, the committee emphasized its dedication to maintaining its existing policy stance. It was evident from the announcement that the RBI has no intent to withdraw its accommodation stance regarding its decision on repo rates. 

The choice by the RBI to keep the repo rate seems grounded in two crucial factors:

• Managing Inflation: The easing of inflationary pressures indicates a movement toward the RBI’s target range of 2-6 per cent. This implies that the existing monetary policy stance is proving effective in curbing inflation.
• Vigorous economic expansion: The initial six months of the fiscal year have seen robust economic growth, especially in the manufacturing and construction sectors. This suggests that the economy is well-established and can endure a temporary halt in interest rate increases.

Lauding RBI’s decision, Umeshkumar Mehta, CIO, SAMCO Mutual Fund explains, “The Central Bank positioned its prudent stance keeping the repo rate unchanged at 6.25 per cent and signalled to remain focused on the withdrawal of accommodation. This certainly is music to investors’ ears by subtlety communicating the peaking of the interest rate cycle, with no increase in interest rate in sight.  Further, balance sheet moderation as a percentage of GDP is applauded and shows strength in the independent thought leadership of RBI.”

Does the RBI’s view on maintaining the repo rate hold good for the market? Palka Arora Chopra, Director, Master Capital Services explains, “The RBI’s policy announcement is largely based on market expectations and will not have a major impact on the domestic market. Interest rate-sensitive sectors such as autos and real estate will benefit as consumers will now spend more taking into account borrowing cost forecasts. RBI has revised its FY2024 growth forecast from 6.5 per cent to 7 per cent which will boost investor confidence.”

Akhil Mittal, Senior Fund Manager, Tata Asset Management adds, “As expected, the policy was a non-event with no change in rates or stance. Strong growth trends domestically and falling inflation have both been highlighted. Liquidity condition developments remain aligned with the policy stance and hence no open market operation sales were required (as mentioned in the previous policy). RBI seems to be committed to achieving the inflation target while keeping a close watch on global financial market conditions. With policy largely in line with expectations and no mention of open market operation sales (which led to a sell-off in the last policy review), we expect markets to perform better and yields to come off 5-10 bps across the curve. Overall, at the margin, policy seems to be positive for markets.”

Deepak Agrawal, CIO - Debt, Kotak Mahindra AMC elaborates, “The macroeconomic pitch has improved from the last policy. Global yield lowers, GDP growth for FY 24 is now pegged at 7 per cent and inflation for April- Dec FY 25 at 4.6 per cent. Some segments of the market were expecting RBI to accelerate (change the stance to neutral), however, RBI chose to play defensive and be in ‘wait and watch’ mode, kept the rates unchanged and maintained the withdrawal of accommodation stance. We believe RBI will start accelerating (change the stance to neutral) from the April 2024 policy.”

Does the current RBI stance bode well for the market?

Nifty50 breaches the 21,000 milestone for the first time, coinciding with the RBI outcome announcement. While the markets have experienced an upward trend, their future movements will hinge on a blend of international macros, domestic macros, and earnings.

Rajiv Sabharwal, MD & CEO, Tata Capital explains, “The RBI has maintained a status quo on rates, reaffirming its withdrawal policy stance. The stated aim is to accelerate economic growth, and this showcases the RBI’s balanced approach in response to the current economic climate. The India story continues to reach new heights, with the GDP growth projection raised to 7 per cent for FY24, indicating the RBI’s confidence in economic resilience and signalling optimism across all sectors.”

Nimesh Chandan, CIO, Bajaj Finserv Asset Management shares, “On macro-economic stability, India is well positioned compared to many other countries. Amidst the world, where many economies are experiencing a sharp slowdown, India is sailing smoothly on a healthy growth trajectory. Inflation is under check. However, food inflation is to be closely monitored in the near term. The RBI displayed a more balanced approach when it comes to liquidity. Compared to the last policy where the Governor spoke about open market operations, this time he emphasized the risk of over-tightening.”

A strong impetus to the housing loan sector

Maintaining the repo rate unchanged indicates the RBI’s confidence in the stability of current economic conditions, signalling that immediate adjustments to monetary policy are unnecessary. This choice may offer relief to individuals with home loans and other floating rate loans, potentially preventing additional hikes in interest rates.

Elucidating how the unchanged repo rate will affect the home loan market, Himanshu Panchmatiya, Cofounder, Switch My Loan says, “With a focus on inflation, liquidity, and currency management, the repo rate is expected to remain 6.50 per cent for the next six to nine months. The market has realised that the current repo rate is the new normal. With no change in the repo rate, there will be no changes in floating-rate home loans and other advances that are linked to an external rate such as the repo rate. The affordable housing market has already taken some beating due to the prolonged higher repo rate. RBI may still consider deploying different tools in sucking out liquidity from the market in case the inflation further shoots up.”

Atul Parakh, CEO, Bigul adds, “Unchanged interest rates translate to lower borrowing rates, which promote the purchase of consumer durables and sustain the need for reasonably priced homes, which is advantageous to real-estate developers. Furthermore, stable rates will assist non-banking financial companies (NBFCs) and other current borrowers whose loans are tied to repo rates, including auto and home loans, by enabling them to maintain funding costs lowering borrowing costs for their clientele. Banks could be moderately hit since their margins might contract. Unchanged rates could reduce the competitiveness of exports, which would hurt export-oriented industries like textiles and pharmaceuticals. The RBI’s decision may not affect sectors that are not sensitive to interest rates, such as FMCG, agriculture, and basic services.”

Where does the banking sector stand amidst constant repo rates?

The MPC’s choice to keep the repo rate unchanged indicates an increasing optimism toward the Indian economy. This is especially favourable for the banking sector, which encountered difficulties during earlier rate hikes.

Lower or stable repo rates result in a decreased cost of funds for banks, contributing to elevated net interest margins and enhanced profitability. This, in turn, can lead to improved capital adequacy and overall financial well-being for the banking system.

Anil Rego, Founder and Fund Manager, Right Horizons PMS explains, “Markets have touched new highs, especially with earnings for the H1FY24 coming healthy supporting the trajectory. Investors are bullish as they are favouring rate cuts in 2024 which will unanimously boost the equity markets. The banking sector is the most sensitive to changes in rate cycles and has been a major reason for incremental earnings in FY23 and in the first half of FY24 benefitting from the hikes and credit growth being robust and persistent. Prolonged rate cuts will eventually lead to narrowing interest margin but we expect rate cuts to begin in the last quarter and hence the trend in the banking sector is likely to continue in FY24. NBFCs will be best positioned to benefit from cuts in rates as credit growth will improve followed by banks.”

Sonam Srivastava, Founder and Fund Manager, Wright Research PMS, shared, “The MPC’s decision is likely to be well-received by the stock market, as the maintenance of the status quo on interest rates often provides a sense of stability and predictability to investors. Specifically, the banking sector may see a steady operational environment, which can be conducive for sustained lending and financial activities.”

With borrowing being easier than before now, Aalesh Avlani, Founder and Director, Credit Wise Capital said, “The unchanged repo rate is a positive step for India’s credit economy, particularly for customers in rural areas who can now borrow more freely. This was witnessed during the recent festive season, where vehicle sales reached record highs, largely due to steady interest rates and lenders passing on the benefits to customers.”

Maintaining a steady repo rate enables the RBI to assess the consequences of its prior policy measures on inflation and economic growth. Additionally, it affords a degree of relief to businesses and individuals in the ongoing recovery from the pandemic and the worldwide economic downturn. There seem to be no expectations regarding sudden rate hikes in the coming months.

Vikas Garg – Head of Fixed Income, Invesco Mutual Fund said, “The MPC turns less hawkish and adopts a balanced approach. Pauses on policy rates for the fifth consecutive time and retains the stance as ‘withdrawal of accommodation’ as expected. FY24 inflation projection is unchanged at 5.4 per cent despite higher food prices and much stronger GDP growth. Not much overhang of G-Sec open market operation sales for now as systematic liquidity is already in deficit and significant reduction achieved in RBI’s balance sheet. Risk-reward remains favourable for the debt market with no rate hike expectations.”

While other economies contemplate adjusting policy rates due to economic slowdowns, India stands out as an outlier in an exceptionally favourable position.