Rate Cut - A panacea for private investment?
Finally surgeon, Raghuram Rajan gave in to clamoring from government and industry to cut the Repo rates (The rates at which banks borrow from Reserve Bank of India). The much awaited and a larger than expected decrease by 50 basis points (.5%) has been welcomed by markets, industry and government too.
In my last post around this subject “India at cusp”, I did mention about this medicine being sought actively by industry. In the build-up to this rate cut, lot of speculation about the environment, % decrease etc. took place. Despite a conducive climate, all pieces on chess-board being favorably aligned; Indian industry has been reluctant to invest.
Upcoming festival season could be key to kick-start a turnaround. Automotive and Real Estate sectors wait to offload excess capacity. Consumer demand spurt is not unexpected during festival season, what remains to be seen are whether the builders would be ready to reduce prices!
Real estate industry turnaround will result in heightened construction activity. With Lower EMI’s and better deals, sluggish markets of Mumbai, Gurgaon and Bangalore could see some momentum swings. Banks have passed most of the benefit accrued from RBI to consumers. Will that be sufficient, is yet to be seen.
With lower cost of borrowings, lower interest rates in fixed financial instruments, consumer savings should hit the stock markets (interest rates and bond prices are inversely related). Good days ahead for investing on the index with Fixed Deposits, PPF and other conventional instruments offering lower yields in near future. With US Fed rates also remaining unchanged, intra-bank/country rates also remaining stable, sources of funds for industrialists are aplenty. Agency costs of debt need to be triggered in for better utilization of resources.
Long term perspective would be to invest in “Value Add” manufacturing. Moving up the value chain has to be the main aim. (India is a large commodity importer in general). Manufacturing of electronic components should be given more impetus. Electronic white good imports are threatening to surpass even petroleum imports in near future. We missed the semiconductor bus; hopefully we will utilize the latest near perfect macroeconomic environment to make India a manufacturing hub. Let’s make 8% a new normal in Indian GDP growth story.
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