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Home loan norms, interest rates: Brokerage views on RBI's policy review

Puneet Wadhwa / New Delhi 08 Jun 17 | 11:49 AM

Inflation continues to remain benign and RBI has acknowledged that inflation trajectory has panned out much softer than its expectations

The Reserve Bank of India (RBI) kept key rates – repo and reverse repo – unchanged while reviewing the monetary Policy on Wednesday. 

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The central bank also sharply lowered its inflation projection for H1 FY18 (year ending March 2018) to 2.0-3.5 per cent (from 4.5 per cent earlier) and H2 FY18 to 3.5-4.5 per cent (from 5 per cent), with risks evenly balanced. It also lowered its GVA growth projection to 7.3 per cent from 7.4 per cent for FY18.

Here’s how leading brokerages and research houses interpret the RBI’s move.


In our view, the RBI has rightly looked through the current period of low inflation. Our longer-term models are still predicting a return of inflation to pre-demonetisation levels next year and household inflation expectations have barely budged.

We expect near-term inflation to continue to moderate. However, we expect a cyclical recovery in H2 2017, which in turn will gradually slow current disinflationary pressures on core inflation, albeit with a lag. Taking into account the recent downside surprise on food price inflation, but accounting for the house rent allowance increase, we are revising our 2017 average CPI inflation forecast to 3.6 per cent (from 4.4 per cent) and to 5 per cent in 2018 (from 5.4 per cent).

We expect the RBI to stay on hold through 2017 with an eye on the medium-term target of 4 per cent. Because of lower expected headline inflation in the next two months, we would assign a 40 per cent chance to a rate cut in August, but our base case is on hold. We are pushing out our call of a cumulative 50 basis points rate hikes to H2 2018 (vs Q2 and Q3 earlier).


We believe that time is running out for the RBI to cut rates. If the RBI MPC cuts on August 2, it will signal a lending rate cut to banks before the busy industrial season sets in October. After all, real lending rates are running at a 20-year high at a time when the global recession is threatening to stretch beyond the Great Depression. 

As 2015 showed, unduly delaying RBI rate cuts into the busy season only delay the transmission to bank lending rates into the next slack season beginning April. Should easy liquidity not drive lending rate cuts? Not really. Although banks are flush with temporary liquidity from demonetisation, M3 growth has slipped to 9.5 per cent from 10.7 per cent last year.


Inflation continues to remain benign and RBI has acknowledged that inflation trajectory has panned out much softer than its expectations. Further, the tone of policy was less hawkish as compared to the previous one, as it expects the inflation to glide down towards 4 per cent mark by March 2018 based on the current dynamics. 

Going ahead, any action on rate front will be a function of downside surprise to the RBI’s 2HFY18 inflation estimates and data on underlying inflation pressures viz. input costs, wages, and imported inflation. We believe inflation is likely to surprise on the downside, leaving room for an interest rate cut.


The RBI further relaxed norms for housing loans: 

a) reduced risk weight in a few categories, and b) cut standard asset provisions on all housing loans. While these guidelines are currently applicable only to banks (with immediate effect for individual housing loans sanctioned henceforth), generally the same norms are followed by NHB with a lag. Hence, it would not be wrong to expect similar guidelines for HFCs in the near term. The move vindicates continued government and regulatory support to incentivising housing loans. 

We expect: a) HFC segment’s secular growth story to continue; and b) incremental rate benefit to be passed on to consumers. We retain our positive stance on the housing finance segment. Within HFCs, we prefer players with established niche – Dewan Housing and Repco Home Finance – over pure mortgage players (HDFC).


We believe a cut in standard asset provisioning and relaxation of risk weights on new higher ticket loans by RBI is a positive for housing finance segment. While government’s interest subsidy scheme was aimed at boosting home loans in the low-mid ticket segment, the change in norms announced should lower capital requirements on mid to higher ticket home loans. HFCs focusing on higher ticket loans may be able to increase leverage, which could also boost RoE.


We expect RBI to go for a 25 bps rate cut in the second half of 2017. It is cognizant that inflation has come down but would like to be certain before taking any step here. More likely in the month of October, if the inflationary impact, if any, of GST and hike in allowances under 7th Pay Commission, the higher deficit on account of loan waivers etc. is within the admissible limits of RBI. The central bank will be in a much better position to initiate a rate cut in case monsoon turns out to be normal and oil prices continue to decline.


We acknowledge that odds of a rate cut in August is rising. The deciding factor, in our view, will be a) May inflation slips below 2.5 per cent, and b) if Jun inflation breaks below their projected path; in essence testing the lower bound of the targeted 2-6 per cent range. The minutes due on 21 June will be watched for any guidance shift amongst the individual members, especially the one who dissented on Wednesday.


In view of the material cut administered in the RBI’s inflation forecast for 1HFY18, we highlight the high and rising probability of a rate cut in the August/October 2017 policy review. Separately, it is worth noting that the RBI is gearing up for dealing with the stress in the banking sector, albeit in a very small measure.

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