RBI cuts repo rates by 25bps, boosts growth
Reserve Bank of India on Thursday offered a pleasant surprise to the entie country by cutting its repo interest rate by 25 basis points to 7.75 per cent from 8 per cent earlier, making its first reduction since May 2013. The rate cut ahead of a scheduled RBI policy meeting on February 3 will result in more money in the hand of the consumers who are looking for cheaper home and auto loans.
The decision came before the stock markets opened for trading that lead to the BSE Sensex soaring 728 points and NSE Nifty gaining 216 points during the trading session. The decision came as inflation showed signs of slowing and oil prices falling to 5 year lows. Consumer Price Index (CPI) data released on Monday showed retail inflation at 5 per cent, while wholesale price index data released on Wednesday showed wholesale inflation inched up to 0.1 per cent.
“Households inflation expectations have adapted, and both near-term and longer-term inflation expectations have eased to single digits for the first time since September 2009, especially crude. Crude prices, barring geo-political shocks, are expected to remain low over the year,” RBI said in its statement. However, the Central Bank has kept the Cash Reserve Ratio (CRR) unchanged at 4 per cent.
Acknowledged the interest rate cut, the finance minister said that the move is positive for the Indian economy and will certainly help in reviving the investment cycle the Government is trying to restore. “The RBI decision to cut the interest rate will lead to more money in the hands of the consumer for greater spending. It is positive for the Indian economy and it will certainly help in reviving the investment cycle the Government is trying to restore,” finance minister Arun Jaitley said.
With banks now easing their lending rates, consumers will get less money for their deposits. The largest public sector bank, State Bank of India chairman Arundhati Bhattacharya said, “Definitely those cuts will happen. We have been talking for a while now about the easing of the rate cycle. The deposit cuts as you would know, we have already started factoring that in from as early as October.”
Market experts believe that Central Bank will cut interest rate further as global commodities and growth rate is likely to be tepid. Ashish Vaidya, executive director and head of trading, India, at DBS Bank ltd. Said, “I expect RBI to cut rates by another 75 bps which means that 10-year yield could come off to at least 7.55 per cent in the next couple of weeks.”
Bankers also feel that a reversal in policy trend could be seen in coming days. Shikha Sharma, Axis Bank chairman said, “(The rate cut)..means reversal of policy stance. From banks perspective, the cost of funds need to come down to pass on the benefit. This is beginning of an easing cycle and if inflation remains benign and macro numbers are good, we should expect more rate cuts.”
Confident that the Central Banks move to cut interest rates would give a major fillip to the economy, Chief Economic Advisor Arvind Subramanian said it signals a shift in the policy stance and direction going forward. “It will provide a fillip to the economy, both directly and indirectly. It is a significant move because it signals a shift in the stance and direction of policy going forward,” Subramanian said.
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