Good days ahead for Indian economy?

According to the United Nations, the Indian economy is likely to expand by 6.4% in 2015, driving the economic growth in South-Asia, and witness progress in implementing much-needed structural reforms is likely to boost India’s economic performance in 2015.

Optimistic with the fall in prices and surging Sensex, the RBI Thursday Jan 15, encouraged by softening inflation, decided to cut the interest rate by 0.25% to 7.75% with a view to boost growth.

This cut in repo rate will have a direct impact on not just home loan rates but is a positive sign for all borrowers.

We take a look at all the factors that led to the smoothening of the Indian economy, the fall in inflation and how it all affects the common man.

 

Inflation

In October 2014, the Consumer Price Index (CPI) inflation dipped to 5.52%, touching a historic low, compared to the same period last year, its lowest rate since the government started releasing the data in February 2012.

For September, CPI inflation was 6.46%, making October’s numbers the third consecutive month that retail inflation has eased in succession.  

Most of the food-sub groups showed a fall in prices in October. The biggest drop came from vegetable prices, where prices actually fell 1.45%, compared to a rise of 8.59% in September.

Fruit prices eased to 17.49% from 22.40% in September. However, pulses and products rose 7.51% from 7.18% in September, while condiments and spices rose to 8.85% from 8.58%. Eggs, fish and meat products and oils and fats did not show any month-over-month change in inflation.

2014 Inflation graph

Image: the average inflation in 2014 was at 6.42%

 

However, core CPI inflation eased to 5.2% in December 2014 from 5.5% in November 2014

All-India general CPI inflation rebounded to 5% in December 2014 from nine-year low of 4.4% in November 2014, while snapping consistent decline for four sequential months. An increase in inflation for food items contributed entirely to the inflation rise in November 2014.

The corresponding provisional inflation rates for rural areas were 4.7% and 5.3% for urban areas in December 2014, as against 4.1% and 4.7% for November 2014.

The CPI inflation increased in December 2014 was entirely driven by higher in inflation for the food, beverages & tobacco group to 5.1% in December 2014 from 3.6% in November 2014. Inflation for fuel and light was flat at 3.4%, while inflation for housing eased to 7.8%.

Further, inflation for clothing, bedding and footwear eased to 6.5%. Inflation for miscellaneous items also declined 4.0%.

 

Repo rate

The RBI Thursday Jan 15, encouraged by softening inflation, decided to cut the interest rate by 0.25% to 7.75% with a view to boost growth.

The RBI has been keeping the benchmark interest rate at elevated level at 8% since January 2014.

Following reduction in the repo rate, the reverse repo rate has been adjusted to 6.75% and the marginal standing facility (MSF) rate and Bank Rate to 8.75%.

The RBI said that the Consumer Price Index (CPI) has been easing since July 2014 and was below the expected trajectory and the government has reiterated its commitment to adhering to its fiscal deficit target.

The crude prices, barring geo-political shocks, are expected to remain low over the year, it said.

The Reserve bank in December had said that once the monetary policy stance shifts, subsequent actions would be consistent with it.

There was a need to ensure that potential output rises above the projected pick-up in growth in coming quarters so as to contain inflation, the apex bank said.

 

Home Loans and Repo Rates

Once the banks analyze their cost of funds and their overall liquidity condition, the lower interest rates would have to be passed on to the end user or the retail customer. This would effectively mean lower EMIs on home loans, auto loans as well as personal loans.

The home loan segment is likely to be buoyed because of this fall in repo rate.

The question as to whether banks would actually decrease the lending rates amid the fall in the repo rates remains an open one. Once done with analyzing their costs of funds and bank liquidity conditions, the banks would have no option but to decrease their interest rates in the coming months.

For example, assuming the interest rate on a 20 year housing loan of Rs 75 Lakh is decreased from 11.25 to 11%, it will translate into a decrease of approximately Rs 1279 per month in the EMI.

 

Crude

India, which is the fourth largest consumer of oil, is a big beneficiary of falling oil prices which have already plunged 60% from their 2014 peaks hit in June 2014. 

After the sudden fall, global brokerage firms Goldman Sachs said in a report that US oil prices need to trade near $40 a barrel in the first half of this year to curb shale investments as it gave up on Organisation of the Petroleum Exporting Countries (OPEC) cutting output to balance the market.

As per rough estimates, a $10 fall in crude could reduce the current account deficit by approximately 0.5% of Gross Domestic Product (GDP) and the fiscal deficit by around 0.1% of GDP.

With the exception of the US, most of the key world economies are facing deflation and near-zero growth. However, experts feel that among the emerging market group, India is likely to outperform.

According to a study by Goldman Sachs, emerging markets (EMs) are expected to grow at 4.9% compared with 6.4% growth for India in 2015. 

Crude oil prices are near six-year low and OPEC countries are not ready to cut output and rather than cutting output they are offering discount to their customers to maintain their market share.

Low oil prices would reduce inflation and the oil import bill, which surged to $160 billion last year and is likely to be around $100-110 billion this year, media reports suggest. It would also bring down subsidy on kerosene and cooking gas.

 

Image courtesy: Infomine.com