The Reserve Bank of India (RBI) Governor, Raghuram Rajan, in the monetary policy review took everyone by surprise by announcing a 50 basis point (0.50%) reduction in the repo rate. This has brought the repo rate to 6.75% and has also reduced the reverse repo rate to 5.75%. The repo rate is the rate at which banks borrow from the central bank, while reverse repo rate is the rate banks deposit idle funds with the central bank. Most analysts were expecting a rate cut of 25 basis points from the RBI governor.
This is the fourth rate cut during this year and the repo rate now stands at its lowest in almost four years. The last time the repo rate was at 6.75% was in March 2011. This particular rate cut is however most significant as the level of the rate cut to half by half a percentage point suggests that the RBI governor is sure that inflation is truly down to a manageable level and not an immediate threat to the economy. Acknowledging this, Rajan said that disinflation has been broad-based and inflation, excluding food and fuel, has also come off its peak in June.
The governor also acknowledged the finance ministry’s call to accelerate growth and as a result felt the need boost domestic demand to balance the weakening global demand. He further said, “Investment is likely to respond more strongly if there is more certainty about the extent of monetary stimulus in the pipeline, even if transmission is slow”. This shows his intent to promote investment by creating an environment where can continue to borrow and by that way look to boost demand for products and services.
The sectors which will primarily benefit from the rate cut will be the banking sector (BFSI) as home and corporate loans will be cheaper. This is expected to boost demand as banks are expected to pass the benefits to companies and home loan seekers. Apart from this it has also reduced the reverse repo rate which means that it reduces the interest rates for the funds it keeps idle with the central bank, thereby inculcating to banks to promote lending. As a result the real estate industry is also one of the primarily beneficiaries as it lowers interest rates on loans for property and thereby infuses demand. Another industry to benefit is the automobile industry that is also driven by loans. With the festive season approaching this news comes at the right time for auto companies looking to boost their sales during the next few months.
These are key sectors for the advertising and marketing industry and could see their ad spends increase in the coming few months in order to boost demand. Apart from these sectors there are other sectors and companies that will also take advantage of the lower borrowing rates to infuse more investment into expansion. This could also result in more funds being put into marketing plans to foster growth. Especially with the festive season approaching many sectors such as retail, consumer durables, handset manufacturers, etc. will look to drive demand through heavy marketing, thus taking ad spends higher. For instance, in an earlier article on exchange4media we saw that the auto industry festive spends could rise to Rs. 1,500 crore this year.