C&W Impact of Monetary Policy 2009

8/14/2019 C&W Impact of Monetary Policy 2009

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BUSINESSBRIEFING

Impact oF moNEtaRy polIcy2009

apRIl 2009 | a cUSHmaN & WaKEFIElD RESEaRcH pUBlIcatIoN

1 Indi: annu mner pi

2 previus Exnsinr pi

ains

3 RBI ains

4 I

the annu mner i is sreg uined b he Reserve

Bnk f Indi nr ss, su nd vibii f ne wihin

he sse in rder bne grwh nd infinr ressures

fed b he en. the revius RBI gvernr, Dr. y.V. Redd hd

inrdued nrinr iies where he s f funds (ne)

ws inresed in rder uri grwh nd redue infinr

ressures. cnrinr iies whih ed u iquidi fr

he en, ued wih he gb uri resued in grwh

derin nd hd rie effes rss indusries inuding re

ese. mr. Subbr, reing he exree ndiins sed b he

gb eni reessin nd is ren effe n Indis en,

hs ded re exnsinr i. Inernin, fer hving

fied resre rder vi re nvenin ehds, enr bnkshve resred unnvenin esures suh s quniive nd

redi esing. the RBI n he her hnd hs been hed f he

eni urve b king rreive esures reven degrwh

nd hs enugh dr wder1 use wihu resring he

unnvenin ehds where he i f reviving redi fw nd

surring ggrege dend is n esured hisri.

1BUSINESS BRIEFING | apRIl 2009 1

INDI a: aNNUal mo NEtaRy po lIcycoNtENtS

For more information please contact:

Anurag Mathur

Cushman & Wakefield

4th Floor, Pine Valley

Embassy Golf Links Business Park

Intermediate Ring Road

Bangalore, India

Tel: +91 80 4046 5555

[email protected]

REal GDp GRoWtH (%)

1Q (ari Jun) 2Q ( Ju Se) 3Q (o De) ari - De

2007-08 2008-09 2007-08 2008-09 2007-08 2008-09 2007-08 2008-09

agriuure 4.4 3 4.4 2.7 6.9 -2.2 5.5 0.6

Indusr 8.5 5.2 7.5 4.7 7.6 0.8 7.9 3.5

Servies 10.7 10.2 10.7 9.6 10.1 9.5 10.5 9.7

over 9.1 7.9 9.1 7.6 8.9 5.3 9 6.9

Source:Central Statistical Organisation (CSO)

Unlike believed initially, the Indian economy has not decoupled although it is less reliant on the

global economy as compared to other emerging nations mainly due to the low exposure towards

high risk assets in foreign countries and exports being less than 15% of GDP, as per the RBI, thus

the demand being more domestic than global. This, however has not spared India from growth

1: Dry powder - term used to imply possibility of further action.


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2BUSINESS BRIEFING | apRIl 2009

I m p a c t o F m o N E t a Ry p o l I c y 2 0 0 9

a c U S H m a N & Wa K E F I E l D R E S E a R c H p U B l I c a t I o N

moderation or a cyclical downturn as it is still connected to the world economies and the RBI hastaken this into account. After the stellar performance of 8.9% annual average for the 2003-2008 (5

year) period, the growth declined considerably in 3Q 2008-09. The RBI has forecasted the GDP

growth for 2008-09 in the range of 6.5- 6.7%. It has adopted a bearish stance on the growth of the

economy for the current scal year and has set the growth target at 6%. The scal and monetary

measures taken during the scal year 2008-09, which were geared to arrest the falling rate of

growth, are expected to show positive effects in the economy over the next few quarters. While

it is acknowledged by the RBI that private investment is likely to remain subdued it is imperative

that private investment remains strong for the economy to enter a high growth trajectory that was

previously being followed.

INFlatIoN RatES

Source: IMA

The RBI is now encouraging growth and propagating an expansionary policy in order to stimulate

demand and is more comfortable to follow this path due to the ebbing inationary concerns

witnessed in the economy. The Wholesale Price Index (WPI) ination which reached its peak at

around 12.91% in August 2008, witnessed a sharp y-o-y decline reaching 0.26% in March 2009 as

against 7.75% same time last year. The WPI ination further declined in April 2009 to reach 0.18%

and is expected to become negative in short term (early 2009-10) as per the RBI. Although the

Consumer Price Index (CPI) ination is still close to double digit gures, it is forecasted to moderate

to comfortable levels as per the RBI in the short to mid term. The WPI ination is projected to be

around 4% by end of March 2010 which relieves India from worrying about deation that developed

economies are trying to prevent. The ample liquidity in the banking system is noted by the RBI and

the fall in credit growth has also been taken into account and prompted their decision in pursuing a

more expansionary policy.

INFLATION

RATES

(inpercentageterms)

Wholesale Price Index Consumer Price Index


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pREVIoUS EXpaNSIoNaRy polIcy actIoNS

Since September 2008, RBI has taken multiple actions in order to ensure that the economy does

not suffer a massive downturn. The RBI has cut the repo rate by 400 basis points from 9% to 5%,

reverse repo rate by 250 basis points from 6% to 3.5% and the CRR by 400 basis points from a high

of 9% to the current 5%. Where as the Statutory Liquidity Ratio (SLR) was reduced from 25% to

24%. The RBI has also reprimanded the Banks which have been slow in passing on the benets

of the lower interest rate onto the borrower. It clearly pointed out that the interest rate cuts by the

public sector banks have been in the range of 1.25%-2.25%, 1%-1.25% for private banks and 1% for

foreign banks. The slackness in passing on benets to the consumers can be seen in a comparison

between reactions of banks to RBI policies in 2004 and 2008. Towards the begining of 2004 theRBI key policy rates were at approximately similar levels although private banks were charging about

7.5-8% during that time and are currently charging approximately 10-11% for home loans.

compaRISoN oF polIcy RatES

Source: Reserve Bank of India

Q4 Fy 2003 - 04 Q1Fy 2009 - 10

csh Reserve Ri 4.5% 5%

Reverse Re Re 4.5% 3.25%

Re Re 6% 4.75%

Sur iquidi ri 25% 24%

HIStoRIcal polIcy

Source: Reserve Bank of India & C&W Research

Valuesinpe

rcentage

term

s


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Lower ination has resulted in higher real interest rates which is essentially compounding the costsfor the borrower as ination is at close to negligible levels while borrowing costs are still at double

digit. This means that the real cost of borrowing is considerably high. For example, one borrows

INR 100 at 10% per annum thus at the end of the year he would have to pay back INR 110 but if

ination was at 10% then he essentially borrowed at no cost as ination was equal to the borrowing

cost (interest paid). However, if he borrowed at 10% and ination was at 1% and he paid back

INR 110 while the value of his money would be equivalent to INR 101 thus the differential paid is

INR 9 which is essentially a higher cost of borrowing. In such a situation it is best for a person to

foreclose all loans and not borrow more, resulting in poorer demand and lower credit growth. The

RBI recognized this in their policy and expressed that even with the long term ination target of 4%

real interest rates continues to remain at a very high level and to counter this phenomenon has usedmoral suasion in order to get banks to bring down lending rates.

The RBI noted that the policy changes undertaken by them have not been followed through

completely or as fast as desired by the banks in lowering their lending rates. While the RBI reduced

its lending rates (repo rate) by 4%, the banks brought down their interest rates only by approximately

0.5-1.5%. The banks in their defense have sighted reasons like high cost of funds due to large

amounts of deposits made previous year at 9 - 11% and as these cost of funds come down, which is

likely to take place during the next 3 quarters, the lending costs would also start to decline.

RBI actIoNS

The RBI has adopted a comparatively more conservative target of 6%, as compared to the

Governments 7% GDP growth target for the current scal, in light of the global downturn resulting

in moderation of growth and muted inationary pressures that are being experienced currently by

the Indian economy. The policy announced a cut in repo and reverse repo by 25 bps in order to

encourage lowering of lending rates, increased lending and stimulate aggregate demand within the

economy in order to mitigate downside risks. After the additional 25 bps cut, currently the repo

rate has lowered down to 4.75% and reverse repo rate to 3.25%. There is also a clear indication that

moNEtaRy polIcy 2009-2010

Source: Reserve Bank of India

As per the RBI the monetary policy stance for 2009-10 will broadly be as follows:

Ensure i regie h wi enbe redi exnsin vibe res whie reserving

redi qui s s sur he reurn f he en high grwh h.

cninuus nir he gb nd desi ndiins nd resnd swif nd

effeive hrugh i djusens s wrrned s s iniise he i f dverse

deveens nd reinfre he i f siive deveens.

minin ner nd ineres re regie surive f rie sbii nd finni

sbii king in un he eerging essns f he gb finni risis.


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the central bank will continue to monitor the economic performance as downside risks continue topersist in the economy and necessary action will be undertaken as deemed favorable which translates

to possibly more rate cuts in the short term.

Impact

Lowering of the interest rates would rst impact the deposit rates offered by banks as they bring

down their cost of funds and then pass on the benets to the borrowers by lowering lending rates.

The impact of lower deposit rates will make xed income instruments less attractive in the short

to medium term. The sharp recent correction in real estate prices that has led to rationalization in

property prices has now made real estate a relatively more attractive option. As the xed deposit ratescontinue to fall real estate as an asset class will start attracting more investments and become a more

preferred investment vehicle.

The cut in both reverse repo and repo is expected to induce banks to reduce their lending rates

as seen with the immediate cut in lending rates by certain private banks of 50 bps. This reduction

in turn will add more spending power of the borrowers as existing loans get cheaper resulting in

increased discretionary income which will start to draw the consumer to spend again and help in

boosting demand. The new loans generation will also be done at a lower rate which will in turn

increase the borrowers affordability. As developers procure additional loans at a lower rate they

would be able to pass this benet on to the end user with lower capital values. The lower lending

rates will also result in lower EMI payment resulting in higher affordability, as the interest rates

continue to soften in the short to medium term. As per the policy the credit to housing by banks

has reduced from 12% on Feb. 15, 2008 to 7.5% on Feb. 27, 2009 from the previous year. Showing

the abating demand which has impacted real estate prices resulting in a correction of 20-30% across

India from the peak levels established in 2008.

On the commercial real estate front, developers who were facing a liquidity crunch, will be able to

abate the stringent cash ows as there is already sufcent liquidity in the banking system and as thelending rate reduces, the cost of funds for the developers would decrease leading to improved cash

compaRISoN oF REal EStatE & FIXED INcomE optIoNS

Source: C&W Research

Invesen oins Fixed Desis 1-3

er

ceri Re

Ese

Resideni Re

Ese

Rei Re Ese

yied/Reurns 8-9% 8-11% 3-6% 9-12%

tx I Ineres xbe Reive re

tx effiien s

n wrie ffexenses e.

Reive re

tx effiien s

n wrie ffexenses e.

Reive re

tx effiien s n

wrie ff exensese.

ci Gins ci gins n if

ineres is reinvesed

peni i

gins

peni i

gins

peni i

gins


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ows. This in turn would help many in completing their unnished projects and meet their expecteddeadlines. Although fears in the system remain that adequate lending might not occur to the real

estate sector due to risk aversion that has developed by banks to control rising NPAs.

The only dampener to the lower interest rates would be the government borrowings which the

RBI has assured will be carried out smoothly with sufcient liquidity in the system being provided.

During the rst half of the current scal year, planned open market operations (OMO) purchases

and Market Stabilisation Scheme (MSS) are expected to add further liquidity of approximately INR

1,20,000 crore in the nancial sector during in the short term. This expected liquidity along with the

rate cuts lead to the long term yields falling after the policy announcement and analysts are expecting

the long term yield to drop below 6% in the short term. The dropping of long term yields andincreasing liquidity is expected to keep the cost of funds relatively low for the banks amounting to

lower lending rates in the short to medium term. A regime of similar components namely low lending

rates, ample liquidity was found during the year 2003-04 which led to the start of the real estate bull

run. Thus we nd that the seeds for the next growth cycle being sowed in the current downturn.

As experienced in 2002-03 the real estate market remained subdued due to lower economic growth,

India is again expected to witness moderate growth during the current nancial year which will

translate to suppressed real estate prices. International agencies such as the IMF and World Bank etc

are pegging revival of the economy in the rst half of 2010 and momentum is likely to be gained

only in the second half of calendar year 2010. Due to the economic uncertainty with forecast ranging

from 5%-7% one can not presently foresee the start of the next real estate bull run, however, the

market is likely to bottom out during the rst half of the next nancial year, making it apt for the

investor to invest in properties at a discounted prices during the year with a long term investment

horizon.

This report has been prepared solely for information purposes. It does not purport to be a complete description of the markets or developments

contained in this material. The information on which this repor t is based has been obtained from sources we believe to be reliable, but we have

not independently verified such information and we do not guarantee that the information is accurate or complete.

Cushman & Wakefield is committed to collation

of high quality base data and assembling

detailed statistics for the major India markets

on a regular basis. This commitment to quality

research provides a strong foundation for all of

our services. Customised, analytical reports are

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investors.

Fr re infrin:

Tanuja Rai Pradhan

National Head

Research & Business Analytics Group

[email protected]

cushn & Wkefied is the worlds largest

privately-held commercial real estate services

firm. Founded in 1917, it has 230 offices in

58 countries and 15,000 employees. The

firm represents a diverse customer base

ranging from small businesses to Fortune

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array of proprietary reports available on its

online Knowledge Center at

www.ushnwkefied.

Authors of the report:

Ray Kallimel

Reserh & Business anis Gru

[email protected].

Kanika Vaid

Reserh & Business anis Gru

[email protected].

Published by Corporate

Communications.

For more market intelligence and

research reports,

visit Cushman & Wakefields

Knowledge Center at

www.cushmanwakefield.com

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C&W Impact of Monetary Policy 2009

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