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Repo Rate Cut; Extension of Loan Moratorium, To Cheer Real Estate

The reduction in repo rate by 40 basis points to further boost liquidity in the economy and an extension of loan moratorium may help revive real estate sector, say experts

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On the morning of May 22, the Reserve Bank of India (RBI), on rather expected lines, reduced the repo rate by 40 basis points to 4 per cent in an effort to further boost liquidity in the economy which has been reeling under the impact of COVID-19 induced countrywide lockdown. As a result, the reverse repo rate stood at 3.35 per cent, said RBI Governor Shaktikanta Das via a video conference. 

Shishir Baijal, Chairman & Managing Director, Knight Frank India said with a cumulative 115 basis point rate cut by RBI as a response to the impact of COVID -19, we are in line with the rate cuts announced by developed economies like USA (150 bps) and UK (65 bps). "It would have been a big respite if the long-standing real estate industry demand for a one - time restructuring of loans was allowed along with the measures announced today," said Baijal.

Anuj Puri, Chairman – ANAROCK Property Consultants said: "Today’s repo rate cut will further help banks to lower home loan interest rates, which may get several more fence-sitters onto the market. Moreover, the repo rate cut may compel banks to reduce the interest rates for FDs even further - this could result in even more people leaning towards housing as a better investment option."

And he is right. Why? Because the repo rate cut will drastically reduce the borrowing cost and will lead to demand generation.

"The banks should immediately pass on the reduction in the repo to ensure the objectives of demand creation and liquidity infusion are achieved. The extension of the moratorium on loans by another 3 months will help institutions and individuals alike in battling the ongoing crisis," Kaushal Agarwal - Chairman, The Guardians Real Estate Advisory.

Sujan Hajra, Chief Economist and Executive Director, Anand Rathi Shares & Stock Brokers said the rate cut "is in line with expectations" as also the "extension of loan moratorium". "The measure to convert the moratorium interest payment into a term loan payable in course of FY21 is the most important announcement. This can reduce NPA, at least in the next 12 month," said Hajra.

Ankush Kaul, President (Sales & Marketing) - Ambience Group said the real estate sector, in particular, will get immense help from the reduction. "With the demand for properties reviving gradually, it will help in reviving sales across the projects," said Kaul.

Dr. Joseph Thomas, Head of Research - Emkay Wealth Management said this move would lead to potential reduction in the cost of funds and the extension of the moratorium will be supportive of financial stability which is of extreme importance as of today. "The fall in the reverse repo rate would serve as a disincentive to banks who hold huge sums of liquidity to look at alternatives including gilts,” he added.

Bankers Worried?

Veena Sivaramakrishnan, partner, Shardul Amarchand Mangaldas & Co. said while borrowers heave a sigh of relief, the Banks and financial institutions will continue to worry. "Their access to committed cash flow continues to remain in suspension and in the already stretched system, banks will find it a challenge to meet the growing needs of financing, the demand for which will continue to be on an increase," she said.

With IBC suspension being on the anvil, while provisioning and asset classification benefits will extend, banks in India will continue to face a challenge with their assets, especially with the moratorium being further extended, she added. "The principle is that any relief to Borrower must commensurate with benefits to the bank. In light of this principle, a 6-month moratorium and the expected suspension of IBC, is likely to hurt the banking and finance sector further," said Sivaramakrishnan.

Kuntal Sur, Partner and Leader- Financial Risk and Regulation, PwC India said that the RBI Governor in his third press briefing in the last two months, informed that the world's fifth-largest economy may enter in negative territory in FY 2020-2021. "To revive the growth RBI has gone for accommodative policy with reducing repo rate by 40 bps. RBI also extended the three-month moratorium of loan repayments, from June 1 to August 31 and pre and post shipment of credits increased from 1 year to 15 months. All these monetary measures are aimed to revive growth in the H2 of FY 2," he said.


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