BackInterest rate cut unlikely; KYC process eased
High inflation continues to dictate RBI's stance. But special festival offers may be attractive
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If you are looking for a rate cut as a borrower or as an equity investor, the takeaway from the monetary policy review is that the wait is going to be fairly long as the central bank is unlikely to cut rates in the foreseeable future. As expected, the Reserve Bank of India (RBI) left policy rates unchanged in its bi-monthly review of the monetary policy on 30 September. Since the outcome was fully in line with market expectations, the stock market did not react to the policy review and ended the day with the S&P BSE Sensex gaining just 33.40 points.
Referring to inflation, Raghuram Rajan, governor, RBI, in his statement said: “Turning to the medium-term objective (6% by January 2016), the balance of risks is still to the upside, though somewhat lower than in the last policy statement. This continues to warrant policy preparedness to contain pressures if the risks materialize." RBI is targeting to bring down inflation based on the Consumer Price Index to 6% by January 2016. Inflation was at 7.8% in August.
“RBI will maintain the extended pause till June-July 2015," said Indranil Pan, chief economist, Kotak Mahindra Bank Ltd, adding that apart from the data on inflation front, the governor will also want to see how policy changes by the US Federal Reserve will affect emerging markets. Therefore, it is likely that the central bank will not cut rates at least in the first half of 2015.
“We are officially pencilling in repo rate cuts starting in 2016, with the central bank likely to maintain stability in policy rates until then. We believe this bodes well for the economy in the medium term as it should ensure a rebalancing by generating higher domestic financial savings to fund investments," said a post-policy note from Nomura.
The market was not expecting anything from the policy; it is more focused on government action. “Apart from a sentimental boost, a 25 basis point (bps) cut in interest rates wouldn’t have had a meaningful impact on corporate India," said U.R. Bhat, managing director, Dalton Capital Advisors (India) Pvt. Ltd. He added that earnings growth will be a bigger driver for the market, which will, to an extent, depend on the policy action by the government.
One basis point is one-hundredth of a percentage.
Investors will also look at how the government approaches the energy sector after the cancellation of coal blocks by the Supreme Court. In absence of support from monetary policy domestically, markets will draw comfort from the global settings as commodity prices have eased a great deal and as of now liquidity is not an issue.
Monetary policy will not have any impact on lending and deposit rates. Any change in this area would be mainly due to the festive season. For instance, in August, State Bank of India (SBI) had cut interest rates on home loans to 10.15% for all loan brackets. For women borrowers, the interest rate for all home loans is a uniform 10.1%. Punjab National Bank, too, reduced interest rates on home and auto loans as part of its festival offer. In September, Oriental Bank of Commerce cut home loan interest rates by 0.5% to 10.25%. So should you choose from the festival offers?
“In case of floating rate loans such as home loans, festival offers should not be the deciding factor because if there is any change in policy rate in the future and banks decide to pass it on to the consumers, your EMI (equated monthly instalment) will increase or decrease accordingly. However, if you are looking to take a fixed rate loan, such as an auto or personal loan, this may be the right time," said Suresh Sadagopan, a Mumbai-based financial planner.
Besides loan rate, banks have revised deposit rates in some maturity baskets due to liquidity conditions coupled with slower than anticipated credit pick-up. For instance, recently, SBI cut deposit rates by 25 bps to 8.75% in the 1-3 year category and increased the deposit rate by 25 bps in the 180-210 days category.
Investors should look at the long-term investment strategy. “The yields have been muted and the 10-year government bond has seen a gentle fall. Yields are expected to be range-bound until RBI makes a move. The inflation target of 6% by 2016 by RBI is hard to achieve and so it is unlikely that it will cut rates soon. Thus, it is unlikely that yields will fall. However, for investors there is still opportunity as it is a good time to invest in corporate bonds via income funds," said Vidya Bala, head-mutual funds research, FundsIndia.com.
Know-your-customer (KYC) process guidelines have been further simplified. RBI stated that banks should not insist on the physical presence of a customer at the time of periodic updates in the account holder’s details. If an existing KYC-compliant customer of a bank desires to open another account in the bank, she doesn’t have to submit fresh documents. Also, KYC-compliant customers will be allowed self-certification for updates, and the bank can now accept a certified copy of the document by post.
Low-risk customers will not have to provide fresh proof of identity and address at the time of periodic updates if there is no change in their status.
RBI said that banks should complete documentation while minimizing the effort on the part of the customer to what is strictly needed. If customers are unable to comply within a reasonable time period, partial freezing will be introduced for KYC non-compliant customers. In such a scenario, only credit would be allowed in such accounts but no debits.
Given the inflation situation and the central bank’s target of bringing it down to 6% by 2016, it is likely that policy rates will not come down in the next 6-9 months. Therefore, the stock market will focus on government action that will help improve earnings. Also, the liquidity position in the global financial markets will remain a key driver.
If you plan to take a loan at a fixed rate, you can avail a festival offer as rates are unlikely to come down in the near future. But keep in mind that floating rates offered during festivals can change later.
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