In a surprise move, the Reserve Bank of India on Thursday cut its repo interest rate by 25 basis points to 7.75 per cent from 8 per cent earlier, making this 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 hands of consumers who are looking for cheaper home and auto loans.
The announcement of rate cut marks the biggest single day gain in the last five years, with the key benchmark index BSE Sensex soaring 728.73 points and NSE Nifty gaining 216.60 points closing the session at 8,494.15 with investor wealth reclaiming the Rs100-lakh crore mark. Previously, the Sensex made its single-largest gain by 2,110.79 points on May 18, 2009.
Taking a cue from the RBI’s move, most of the banks reduced their lending rates providing relief to home and auto buyers. United Bank of India (UBI) immediately announced a rate cut of 0.25 per cent and Union Bank of India cut the rate by 0.50 per cent leaving other banks to tread the same path. Acknowledging the interest rate cut, the Finance Minister said that the move was good for the economy and will certainly help in reviving the investment cycle the Government is trying to restore.
“The RBI’s 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. Although the relief seems too little at present, industry experts believe that more rate cuts are to follow in the coming weeks. This will allow more consumers to pay less for their home loan with EMI’s (equated monthly installment) coming down. Society of Indian Automobile Manufacturers (SIAM) Deputy Director General Sugato Sen also said it was not enough although the move is a welcome one. “The 25 basis points reduction is going to have minimum impact on the EMIs. We expect the rates to further come down in the next few months and the banks to reduce their lending rates,” Sen said, however, adding it was a “very good beginning”.
The decision came as inflation showed signs of slowing and oil prices falling to 5-year low. 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 inching 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.
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 the Central bank will cut interest rate further as global commodities and growth rate is likely to be tepid. lalit Nanbiar, head research, UTI Mutual Fund said, "It is definitely a directional positive. However this is just one of the ingredients for a recovery in business cycle with the others being the Government policy framework and execution as well as global stability. We expect the rate cut to be the start of a downtrend in the benchmark rate but the pace of future cuts will depend on the INR as well as the extent and quality of the fiscal deficit."
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 needs 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 bank's move to cut interest rates would give a major fillip to the economy, Chief Economic Adviser 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.
After the rate cut announcement, Bank Nifty the banking share index touched a record high of 19,410. HDFC, ICICI Bank, ITC, RIl, SBI, HDFC Bank and l&T led the 28 gainers in the 30-share BSE Sensex. The Banking index closed 3.2 per cent higher, the Realty index was up 8 per cent, Auto index was up 2.1 per cent and Capital Goods index finally ended 2.4 per cent higher.
Most Asian stocks ended higher after India cut rates. Key benchmark indices of China, Hongkong, Japan, Singapore and South Korea rose by 0.03 per cent to 3.54 per cent while Taiwan's weighted average eased by 0.16 per cent. "Indian economy is going through a dream run. The mood was visible at the Vibrant Gujarat summit where Prime Minister's confidence was assuring. I believe the bull run is going to continue for a while with intervals of correction," Nirmal Jain, Chairman and Founder, IIFl said.
"The RBI rate cut is a turning point for the markets and it is going to be a mood booster. Foreign funds can increase their asset allocation for India considering the positive developments," Jain added. The rupee also touched two-month high of 61.47 against the US dollar in day trade before closing up by 12 paise at 62.06 on Thursday amid a rally in stock markets as RBI cut policy rate by 0.25 percentage points.