RBI's repo rate increase of 50 bps - the third in a row in line with our expectations

Dr. Samantak Das, chief economist, and head of research and REIS, India, JLL.

The central bank of India, in its current MPC meeting, has hiked the repo rate by 50 bps - the third consecutive increase taking it to 5.4%, the same as the pre-pandemic levels, marking a full reversal of the policy during COVID. This is a total of 140 bps increase since May 2022. This has been done keeping in mind the rise in global rates driven by US Fed and the central banks of Europe.

In India, inflation remains sticky and while moderating is still at 7.1%. This is much above the upper threshold of the target. Even the inflationary outlook at 6.7% for FY 22-23 is likely to remain above the upper end of the tolerance band. RBI is looking to frontload the rise in interest rates to get ahead of global recession expectations and inflation outlook.

It is heartening to note that input cost pressures are beginning to come down and even crude prices are moderating though still around USD 100 per barrel. India's growth cycle remains on the right track with PMI in July remaining above 50 for both manufacturing and services, an indicator of expansion in both key sectors. The global headwinds could delay or prolong the country's growth story but not truly derail it. GDP growth estimates for FY 2022-23 have been retained by the RBI and despite the downward revisions by global agencies, the forecasts are still indicative of India being one of the fastest growing economies going forward.

India's residential sector is in the middle of a prolonged and sustained growth cycle much similar to 2010-2012 period, but more driven by real market fundamentals in terms of homebuyer demand. In fact, sales in H1 2022 (January-June) were the highest in over a decade on same-period comparison and second only to H1 2010. The inflationary pressures and the resultant change in RBI's earlier dovish policy stance couldn't have come at a more inopportune time for the sector. However, we believe that the long-term prospects look healthy given that macro-economic dynamics will moderate to a more favourable one as growth remains intact and global headwinds ease up.

Likely transmission of another 30-40 bps increase in home loan rates may cause some mid-cycle slowdown for the residential sector and likely result in some ripple effect on the upcoming festive season. This could see some short-term disruption to the sales growth momentum. It is however a note of caution and not a reflection on the overall residential sector's health, with the medium to long-term growth prospects remaining intact.

Source : Equity Bulls

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