The Reserve Bank of India (RBI) announced a cut in the reverse repo rate by 25 basis points (0.25%) bringing it down to 7.75% from 8% earlier. Though the decision regarding the rate cut was expected to be made in the RBI monetary policy review in February, it comes earlier than expected. The RBI Governor Raghuram Rajan in his statement also stated that the lower inflation was enabled by sharper than expected decline in the prices of fruits and vegetables since September, declining price pressures in respect to cereals and the fall in oil prices.
Ease in inflation resulted in rate cuts
Data on the Whole Price Index (WPI), which is taken as a measure of inflation in the country, emerged a day earlier to the announcement of the repo rate cuts and showed a fall in inflation from the corresponding month in the previous year. The WPI in December 2014 was 0.11 percent from 6.40 percent in December 2013. The inflation rate based on WPI was nil in November 2014 and was 1.77 percent in October 2014. According to data from the commerce and industry ministry showed that this was mainly due to slower increase in food and fuel prices. Food inflation had eased from 13.73 percent in December 2013 to 5.20 percent in December 2014. Fuel inflation on the other hand had declined to 7.82 percent during this month from 10.87 percent during the corresponding month in 2013.
The Consumer Price Index (CPI), which is also looked as an inflationary measure particularly by RBI, also eased as it declined to 5.2 percent in December 2014 from 5.5 percent in November 2014. With inflationary pressures easing it was expected that this will lead to rate cuts by the RBI which it indicated in the last monetary policy review. The RBI also indicated in its statement that if inflation continues to ease there could be further cuts in the repo rates.
Repo rates being the rates at which the RBI lends to commercial banks, this in turn affects the lending of these commercial banks to various other commercial institutions or individuals. As repo rate cuts bring interest levels down it inevitable promotes more borrowing through the reduction in interest rates and brings about more liquidity in the market. This in turn leads to more spending as spending powers increase and pushing demand and the overall growth in the economy.
Sectors expected to gain benefits
Though the rate cuts will have an impact on the whole economy, there are few sectors that will see a much quicker impact than others. This includes primarily the real estate industry and the banking, financial services and insurance (BFSI) industry. The reason being that rate cuts bring more liquidity and allows banking and financial services companies to not only lend more easily but also allows them to cut down interest rates triggering people to take advantage of the low interest rates in the real estate market, thereby boosting growth in these two sectors in particular.
Sachin Sandhir, Global MD – Emerging Business and MD – South Asia, RICS said, “The move by the RBI to cut the repo rate by 25 basis points to 7.75 per cent from the earlier 8 per cent comes on expected lines. The primary reason for the repo rate cut is the consistent easing of the inflationary pressure, as indicated by the recently published government data. With the rate revision, it is likely that there will be a surge in corporate lending. This would benefit the real estate and construction sector firms too.”
Nayan A. Shah, CEO & MD of real estate group Mayfair Group said, “It is a very positive sign that Dr. Raghuram Rajan has initiated. It is first rate cut after 2013 and this will induce banks to offer new home loans at the rate below 10% after a gap of around 4 years which shall act as confidence building move for new home buyers. Also, lending rates by banks to real estate developers will reduce. This shows the confidence in the economy and that now inflationary pressure is within control and now on more growth can be seen.”
Shubhada Rao, Senior President & Chief Economist, YES BANK said, “Going ahead, RBI has established that further easing will be a function of Government’s policy function. The disinflationary process still remains incomplete, as the economy is yet to fully absorb the sharp deceleration in commodity prices led by oil. Inflation momentum is this expected to ease further. This along with Government’s policy support, should allow RBI to front-load the cuts in the repo rate, which we anticipate to the tune of another 50 bps in 2015.”
This doesn’t mean that other sectors will not benefit from the rate cut, but meaning that the benefits of this will eventually trickle down to other such as retail, FMCG and others say senior marketers who we spoke to. The effects they say will only be felt after the completion of a quarter.
Expected increase in ad spends?
In a recent article in exchange4media (How the drop in inflation could help push ad spends in 2015) we saw how the decline of inflation could lead to higher ad spends in 2015. With inflation being part of the overall machinery of economy the wheels set in motion to increase the ad spends growth. According to some marketers the first sectors that will see the increase in ad spends will be the real estate and the BFSI sectors as they are the two that will try to take advantage of this period and convince people to go for big investments like a home with the help of financial aid with lesser interest. Apart from this we can also expect the automobile market to get a big boost from this as automobile interest rates will decline too.
If the monetary policy continues along this path and provided inflation remains low we can expect a lot more investments which will lead to an increase in ad spends in order to boost demand. With the discretionary spending power of consumers increasing will help open up other sectors too such as FMCG, automobiles, consumer durables, ecommerce, handset manufacturers, etc. However, we can expect marketing budgets and ad spends cannot be expected to increase in the short term but in the medium to long term.