The Reserve Bank of India (RBI) on Wednesday cut its repo rate by 25 basis points to six per cent for the first time since October 2016. This came as the central bank’s inflation outlook eased, prompting the measure.
But while the rate cut, coming after nearly a year, was welcomed by India Inc, industry captains and executives Business Standard spoke to said that a 50 basis point cut would have been ideal.
The reason for this, they said, was that a steeper cut would have spurred consumption demand in sectors such as consumer durables and automobiles. In infrastructure and capital goods, a cut in the repo rate will imply cheaper loans and therefore a reduction in the interest cost for companies operating in the space.
“A rate cut is always welcome because it does affect sentiment. The feeling that lending rates will come down can push consumers to advance purchases, which is a good sign. Having said that, I was hoping that the rate cut would be a little more, at least 50 basis points, because that would have really spurred consumption demand,” said B Thiagarajan, joint managing director, Blue Star Ltd.
Sumit Sawhney, country chief executive officer and managing director, Renault India Operations, said, “The 25 basis point rate cut is a welcome measure that will cheer the automobile market. But the real impact of the rate cut will be visible when banks pass on the benefit to consumers by lowering interest rates on car loans.”
“The benefit in our kind of products (if banks decide to pass on the rate cut) is minimal as loans are taken for 24-36 months. Nevertheless, it boosts sentiment and the direction is positive,” said S Ravikumar, president (business development), Bajaj Auto.
Sunil D’Souza, managing director, Whirlpool of India, said, “Given that consumer durables are high-value purchases, we expect that lower financing costs as a result of the rate cut will drive higher growth momentum in a low-penetrated market.”
chart Manish Sharma, president and CEO, Panasonic India & South Asia, said, “We welcome the repo rate reduction. This will lift consumer sentiment ahead of the festive season and strengthen the business growth outlook across the country.”
At its press conference to announce the rate cut, RBI officials indicated that banks had been quicker in lowering lending rates for home and automobile loans in the last few months. However, interest rates had not been pared on loans for white goods and consumer durables, they said.
Finance schemes are a big draw in consumer durables, especially during the festive season. Typically, manufacturers and retailers tie up with consumer finance companies to facilitate easy credit. Industry estimates are that 20-25 per cent of sales in consumer durables, especially during the festive season, are financed by these schemes.
Videocon’s Chief Operating Officer CM Singh said he would track how the interest rate scenario for consumer durables would pan out in the next few weeks but most industry executives admitted they did not see a significant change in lending rates to the sector.
On the infrastructure front, executives said capacity building and utilisation would not be affected in the near term.
MS Unnikrishnan, managing director, Thermax, said, “The rate cut will help the consumption sector, however, utilisation and capacity building for infrastructure and related industries will not be affected immediately. In future, as we see utilisation levels going up due to the consumption story, one can expect improvement in capacity building.”
Harsh Pati Singhania, vice-chairman and managing director at JK Paper, termed the RBI’s decision as “too little”. “While I believe the RBI could have been more aggressive, the 25-basis-point cut will boost consumer sentiment specially for discretionary items like automobiles and white goods,” he said.
“It will not make a huge difference to the (infrastructure) sector at the current rates, but it is a positive step and in the right direction. Micro level issues continue, however, and positive changes at the macro level are welcome,” said KK Mohanty, managing director, Gammon Infrastructure.