MyValueResearch

PSU BANKS – USHERS IN SOME QUANTUM OF SOLACE

For a man gasping for air, a whiff of oxygen would bring life back. The RBI is acting like the much needed whiff of oxygen for the beleaguered Indian economy which is gasping for breath and survival. The best way to kick start the slowing economy is by infusing liquidity into the system. RBI has realized this magic mantra and since last week, has been taking steps in that direction.

SBI set the ball rolling and was the first PSU bank to reduce its Prime Lending Rate (PLR) by 75 bps. Following this, other PSU’s like – Bank Of India, Allahabad Bank, Indian Overseas Bank, Oriental Bank Of Commerce, Dena Bank, Canara Bank, Punjab National bank, Union Bank, Corporation Bank, Syndicate Bank and Bank of Baroda announced similar rate cuts. Strangely enough, the private sector banks have been silent and have yet to follow the footsteps of the PSUs.

This move by the PSU banks is excellent and will go a long way in reviving the market sentiments. Home and car loans which have become unaffordable might soon start getting cheaper. Unless this is supported by the private sector banks, the benefits of the rate cut might not be too far reaching. But one thing which is certain is that eventually be it 15 days or within a week, interest rates all over be it PSU banks or private sector banks is set to come down.

This is very good news for mainly two sectors- the auto and the realty. Both these sectors have faced the biggest brunt of the current slowdown as 80% of home and car buying is funded through loans. Now with interest rates set to come down again, one could see a revival of demand for cars and homes. The auto sector might witness a much better revival than the realty as people would continue to put off purchase of homes on the hope of prices coming down further. . Even a 25% fluctuation in home loan EMIs would make a huge difference. There could be corrections in the real estate prices as well, which could spur demand for home loans in the coming months

Revival of sentiments in the realty sector would mean construction activities would once again get a push and this could have a positive effect on the equally troubled cement sector. It is imperative that ICICI bank and HDFC bank, which together control over 50% of the home loan market, slash their interest rates. Once this happens, demand is bound to go up. Many builders, in the current slowdown have shifted their focus from luxury apartments to building affordable houses in the range of Rs.20- 50 lakhs, so lower interest rates will give a push in the purchase of such affordable homes.

The current rate cut is not expected to push up the realty prices as demand will not exactly start picking up immediately. Over the next 2-3 months, RBI is expected to announce further slash in the interest rates and once that happens, maybe, over the next 4 months, we could see some strong signs of revival in the auto and realty sector. For now, it is good to know that RBI is sitting right on the situation, watching like a hawk and is proactively taking steps to correct the slow down.

The path to revival is long and hard but it’s assuring to know that at least we have now taken that path.