The mid-June budget may throw some clarity on sector-wise focus of the new government, says Balaji Rao

The first bi-monthly policy from the RBI after the new government took charge has nothing new to offer on the interest rate front. On expected lines the rates have been kept unchanged at eight per cent on repo and four per cent on CRR; some easing was done on the SLR up to 50 basis points that would allow the banks a bit of liquidity in the coming months.

Repo is a repurchase agreement that banks enter into with RBI to borrow money on short-term basis that reflects the borrowing cost which in turn affects its lending rates. CRR & SLR are such portion of funds that banks has to compulsorily maintain with RBI in form of cash and eligible securities respectively, which is part of RBI’s risk management norm.

Due to persistent inflation levels and subdued economic growth the central bank has been hawkish about the key interest rates in the past few quarters, keeping the rates tight including liquidity in an effort to contain the surge in inflation. But for a change this time the RBI’s stance has been more dovish than hawkish, signalling a positive sentiment post-election results. Perhaps the RBI too expects easing of various problems that have been plaguing the economy and the positive steps that the new government is expected to initiate may have tilted it towards taking a lenient stance.

The mid-June budget may throw some clarity on sector-wise focus of the newly elected government which RBI too is looking forward to, which may lead to some easing on the interest rate front in its coming policy announcements.

The next RBI policy due in August 2014 may offer some respite particularly for the housing sector. Existing borrowers who have been reeling under higher interest rates paying higher EMIs may find some relief leading to some serious saving opportunities. The overall lending rates too are expected to ease in the coming months which could provide the much needed fillip to the housing sector as also to new borrowers.

Easing of lending rates would have two positive impacts: (1) increase in real estate activity; (2) lower EMI outflow leading to higher spending & saving opportunities. Both would surely lead to a vigorous economic growth in the medium to long term.