The more-than-expected interest rate cut of 50 basis points by Reserve Bank of India (RBI) Governor Raghuram Rajan has given loan takers in the country reason to cheer as Equated Monthly Installments (EMIs) on home, auto, consumer and industry loans are expected to fall significantly in the coming months.
The central bank on Tuesday cut its key interest rate way more than the markets expected, amid the optimism that inflation rates will remain low. The repo rate cut, the fourth this year, brought the repo rate down to 6.75 per cent which is the lowest in the last four-and-a-half-years.
Almost all economists had predicted a 25 basis points cut and no one was really expecting this big a cut. “While the Reserve Bank’s stance will continue to be accommodative, the focus of monetary action for the near term will shift to working with the Government to ensure that impediments to banks passing on the bulk of the cumulative 125 basis points cut in the policy rate are removed,” said Rajan at the RBI’s monetary policy review meeting.
The rate cut of half a per cent will certainly boost the economy and bring down cost of home, auto, consumer and industry loans, which was matched by the biggest lender of the market, State Bank of India (SBI), slashing its lending rate by 0.4 per cent right away.
Besides, leading private banks ICICI and Axis Bank also indicated that they would bring down the lending rates while public sector Andhra Bank cut interest rate by 0.25 per cent.
While the RBI’s action will benefit borrowers, it will also lead to reduction in deposit and savings rates. The Government also disclosed that it will review the interest rate on small savings, PPF and Post Office deposits, to bring them in line with the market.
In its fourth bi-monthly monetary policy review for the current fiscal, the RBI’s rate cut has justified the reduction, saying consumer inflation was likely to be at 5.8 per cent, below the 6 per cent target for January.
“The focus should now shift to bringing inflation to around 5 per cent by March 2017,” Rajan said, adding that the RBI will be vigilant for signs of monetary policy adjustments that are needed to stick to the ‘deflationary path’.
Also, the central bank lowered its economic growth forecast for the current fiscal to 7.4 per cent from its previous projection of 7.6 per cent.
The Government and industry welcomed the RBI’s decision and nudged banks to transmit the benefit to borrowers to boost investments and the economy.
“This decision of the RBI will significantly provide policy support to the real economy and help in the recovery process. We are looking forward now to the transmission of these cuts which will effectively help to boost confidence and investment. They will also help realise the economy’s medium-term potential growth rate,” Finance Minister Arun Jaitley said.
Quick to act on the RBI’s cue, SBI reduced lending rate by 0.4 per cent to 9.3 per cent per annum, setting a trend for a benign rate regime. Announcing the decision, SBI Chairperson Arundhati Bhattacharya said the bank will also be cutting fixed deposit interest rate by 0.25 per cent across various maturities from October 5.
ICICI Bank CEO Chanda Kochhar said: “Clearly interest rates will come down, base rates will come down. A large part of the cut will get transmitted. When I say a large part of the repo rate will get transmitted, it should mean more than half.”
With small saving deposits commanding an interest rate of 8.7 per cent to 9.3 per cent, banks have been reluctant to transmit the entire policy rate cut by the RBI to borrowers. They want to keep their deposit rates attractive to match those in small saving schemes, popular among masses. “It has been decided that the Government will undertake a review of small saving interest rate also,” Economic Affairs Secretary Shaktikanta Das said.
Welcoming the rate cut by the RBI, automobile manufacturers and real estate firms among others said the central bank’s move is nothing but a ‘festival gift’ for them and it would help the struggling sectors in some way or the other.
“On the whole, it gives a good signal to customers. The market so far has been moving very slowly but with this (rate cut) sentiments will improve. It gives the much-needed boost to the market in the pre-festive season,” said Maruti Suzuki India Executive Director Marketing and Sales RS Kalsi.
Realising the overall economic situation and challenges, National Real Estate Development Council Chairman Navin Raheja, welcomed the rate cut. “The rate cut was overdue in the environment of lower inflation and poor domestic demand. It will ease the burden on the buyers and developers. The home buyers were upbeat but in a wait-and-watch mode due to high prevailing interest rates,” said Raheja.