In a surprise move, the Reserve Bank of India (RBI) on Wednesday reduced the benchmark interest rate by 0.25 per cent to 7.5 per cent, going mainly by the Government’s commitment made in the Union Budget that it will continue with the fiscal consolidation process. The decision is likely to ease home loan rates and EMIs may come down with banks expected to take a call on lowering interest rates in days to come.
The cut in key rate will come into effect immediately and other rates will be adjusted accordingly, RBI Governor Raghuram Rajan said in a press statement soon after the short term lending rate (technically known as repo rate) was reduced.
State Bank of India (SBI) Chairperson Arundhati Bhattacharya said, “We welcome the repo rate cut by RBI. With Government embarking on a path of qualitative fiscal consolidation and the formal adoption of inflation targeting, inflation trajectory is expected to stay benign and will aid banks in their decision-making. Our bank will take an appropriate call of a cut in base rate by looking at all evolving circumstances.”
Corporation Bank Chairman and Managing Director Sl Bansal told The Pioneer that a decision on cutting the base rate would be taken soon. The unscheduled decision came within days of the presentation of the Union Budget, taking the markets and banks by surprise. Soon after the rate cut announcement, the BSE Sensex soared to the historic 30,000-mark in opening trade. The National Stock Exchange (NSE) also crossed the 9,000 mark. later on, however, it fell to the day’s low of 29,289.05 in the last 90 minutes of trading before closing at 29,380.73 --- down a hefty 213 points or 0.72 per cent.
The 50-share NSE Nifty also reached a new high 9,119.20, surpassing its previous intra-day high of 9,008.40 hit on Tuesday. However, the emergence of profit-booking at record levels dragged the index down by 73.60 points, 0.82 per cent down, to 8,922.65 at closing bell.
This is the second time in two months that the RBI has cut interest rates outside the regular policy reviews. last time on January 15, it had cut the repo rate by 0.25 per cent to 7.75 per cent.
“Softer readings on inflation are expected to come in through the first half of 2015-16 before firming up to below 6 per cent in the second half. The fiscal consolidation programme, while delayed, may compensate in quality, especially if State Governments are cooperative. Given low capacity utilisation and still-weak indicators of production and credit offtake, it is appropriate for the Reserve Bank to be pre-emptive in its policy action to utilise available space for monetary accommodation,” Rajan said.
The RBI said growth is showing signs of pick-up and retail inflation at 5.1 per cent in January is well below the target. The RBI Governor said the need to act outside the policy review cycle was prompted by two factors --- the data supports the policy stance as well as for providing RBI’s guidance for inflation targeting.
Commenting on RBI’s move, Minister of State for Finance, Jayant Sinha said, “rate cut will provide near term boost. Going forward the rate cycle will be driven by data.” “We will see EMIs come down,” he added.
Chief Economic Advisor Arvind Subramanian said the Government and the RBI have a shared assessment of economic outlook. Growth will pick up in the coming months, inflation is on downward trend, and government’s fiscal consolidation is well on target, he added.
In the policy statement, Rajan said further monetary actions will depend on incoming data, especially on easing of supply constraints, improved availability of key inputs such as power, land, minerals and infrastructure, continuing progress on high-quality fiscal consolidation.
Besides, the pass through of past rate cuts into lending rates, the monsoon and developments in international environment will also decide further rate actions. The RBI is scheduled to announce its next bi-monthly policy statement on April 7.
“Going forward, the RBI will seek to bring the inflation rate to the mid-point of the band of 4 +/- 2 per cent provided for in the agreement, i.e., to 4 per cent by the end of a two year period starting fiscal year 2016-17,” Rajan said, adding that the Budget has “valuable structural reforms embedded” in it which will help improve supply over medium term.
Reacting to the development Ficci president Jyotsna Suri said, “Given the cut in the policy rate, we now hope to see transmission of this move in the form of lowering of lending rates by banks for investment and consumer loans. As measures announced in the Budget take effect and demand situation starts improving, we could see an improvement in capacity utilisation levels leading to fresh investments being planned by industry.” Assocham president Rana Kapoor said the RBI action will surely boost the morale of the consumers as also lower the interest costs of the industry.