RATE CUT IS NOT A MIRACLE PILL FOR GROWTH!

By Ruma Dubey

In a pre-emptive move today, SBI, a day ahead of RBI’s interest rate decision, announced a slash of its interest rate on deposits, even on rates offered on savings account balances; this has happened for the first time since rate was deregulated in 2011.

Effective immediately, SBI announced that accounts with a balance of less than Rs.1 crore will now earn 3.5% on their savings account balances compared to 4% earlier. And accounts with a balance of more than Rs.1 crore will continue to earn 4%.

At end of FY17, SBI had savings account deposits to the tune of Rs.9.5 lakh crore and around 90% of these are deposits with less than Rs.1 crore. Thus the amount of savings which the Bank will earn will reflect directly in its Q2 Net Interest Margin.

Now many on the Street are of the opinion, this pre-emptive move by SBI is an indirect way of arm twisting RBI into cutting rates; sending a signal of sorts to cut rates as it has already made the first move. This can be construed as anything but what we do see is the complete autonomy of banks when it comes to interest rate decisions – after deregularization, this is probably for the first time that we see a Bank exerting its right and might.

This does bring the question to mind – does it really matter then what the RBI does tomorrow? The overall consensus is that RBI will announce a 25 bps rate cut tomorrow. How does this affect you and me?

If and when RBI reduces rates, the banks need to pass on this rate cut to the people. And if the RBI has reduced rates by 25 bps, it does not translate into a full 25 bps rate cut by banks; in fact the banks may or not announce rate cuts and even if they do, it would be around 5-10 bps which would be passed on to the consumers. A 0.05 to 0.10% rate cut will boost savings?

To say that home loans and demand for new homes will see a spike up due to rate cuts is more psychological. There is just the “feeling” that loans cost less and you will be paying much lesser on EMIs.

But are people not buying homes today because of higher loan rates? The reason is far deeper – the sentiments are not as optimistic as what the market makes it to be. Builders say that demonetization and then GST and RERA have dealt them a body blow, especially the smaller and mid-sized builders. A report released in July by property consultant Knight Frank India says housing sales fell 26% in Delhi-NCR in the first half of 2017, and the unsold housing stock stood at a staggering 1.8 lakh units, the highest in India. This will take developers four-and-a-half years to sell. Mind you, this slump is despite the 20% price correction in the past 18 months. In Mumbai, the inventory of unsold flats is over 2.5 lakh flats and this could take around five years to clear.

The real reason is not higher interest rates – it is lack of faith on builders that they will be able to complete the projects and hand over; this breach of confidence is one of the biggest reasons why despite a lower interest rate people will not scramble to buy property.  Also data might be showing very low inflation but on the floor, rates are on the rise and property is facing the brunt of higher input costs. Even the small flats, of 500 to 1000 square feet on an average cost Rs.13,000/square feet and this puts off buyers.

Right now there is a deep sense of job insecurity all around and this is also a prime reason why lower interest rates will not cause a buying frenzy.

Growth is low or new investments are not happening because banks are simply not lending to companies. Already suffering and bleeding to death, they do not want to take the risk any more. This is a trend we are seeing in the numbers of most banks in Q1FY18, where almost all have shifted their focus to retail banking and less on corporate. This is the real reason why growth is low and lower interest alone will not correct the situation.

Having said all this, a rate cut will have a positive psychological impact. While banks will continue to cleanup, companies will continue to deleverage and hopefully for some, the lower interest rate will become attractive enough. Eventually, by end of current fiscal, private sector will become able and nimble enough to take advantage of lower rates. For now, if the rate cut happens, it will be more psychological only.