Loan EMIs may fall as RBI cuts repo rate
In Independent India’s first collective interest rate setting decision, the 6-member Monetary Policy Committee, which has three members nominated by the government and the rest from the Reserve Bank, lowered repo rate to 6.25 per cent from 6.50 per cent.
First in six months, today’s cut came amidst big clamour for easing rates especially after the departure of former Governor Raghuram Rajan, who was often accused by some sections, including those from the ruling BJP, of stifling growth by keeping rates too high.
The repo rate, at which RBI lends to banks, was 6.25 per cent in November 2010. It peaked to 8.5 per cent in October 2011.
RBI has reduced key interest rate (repo rate) by 175 basis points since January 2015. However, the banks have been reluctant to pass on the entire benefits to consumers.
The rate-setting panel, MPC, took note of potential cost push pressures that may emerge, including the 7th pay commission award, on house rent allowances, and the increase in minimum wages with possible spillovers through minimum support prices.
The fuller play of these factors will need vigilance to prevent a generalised cost spiral from taking root, it said. Within minutes of the RBI policy announcement, the government welcomed the rate cut saying it will boost liquidity and help achieve 8 per cent GDP growth.
“The Government has announced several measures to cool food inflation pressures, especially with regard to pulses.
These measures should help in moderating the momentum of food inflation in the months ahead.
This has opened up space for policy action, as indicated in the third bi-monthly monetary policy statement,” Patel said in the fourth bi-monthly monetary policy review for 2016-17.
RBI’s current rate cut along with reduction in small savings rates by the government will encourage banks to pass on the benefit to the borrowers, he said.
“The easy liquidity conditions engendered by the Reserve Bank’s operations should also enable the smooth transmission of the policy action through various market segments,” he said.
Finance Secretary Ashok Lavasa said the RBI policy will boost liquidity in the system and both the RBI and government are in sync with the inflation target.
“On the whole, this is a decision which will go down well with all sections of the economy,” Lavasa said.
When asked if banks will pass on rate cut, he said: “It depends on the banks. Banks also decides based on market sentiment”.
Terming this move as a ‘very strong’ message by RBI Governor, Chandrajit Banerjee, Director General, CII said, “More than the quantum of the rate cut, it sends a very positive signal. We can very clearly see that in the growth-inflation trade-off, the RBI is favourably inclined towards promoting growth in the economy.”
“It is apparent from the policy document that uncertainties and global headwinds weighed more on the MPC than the domestic issues which seem to be getting favourable. The favourable domestic factors include benign inflation rate, helped by good monsoon rains and a firm grip on the fiscal situation despite burden of the Pay Commission,” said Secretary General, Assocham, DS Rawat.
On transmission, SBI Managing Director P K Gupta said: “I think policy rate is on expected line. The bank has already cut rates. Deposit rates were cut recently. Lending rate cuts are happening every month. And RBI also said that transmission is happening.”
Dalal Street also celebrated this news with Sensex surging by over 159 points and the Rupee too strengthened against the US Dollar, buoying the overall mood. The key now is the real transmission of the lower rates by the banks to the end consumer.