Equated Monthly Installments (EMIs) on home and auto loans are set to get cheaper as the Reserve Bank of India (RBI) on Tuesday reduced the short-term lending rate by 0.25 per cent to over 5-year low of 6.5 per cent, taking the total cut to 1.5 per cent since January, 2015 .
“Don’t look at the monetary policy review as 25 bps (cut alone). look at the composite of measures (marginal cost of funding-based lending rate methods effective April 1), they all add up. Borrowing rates are coming down significantly in the economy,” said RBI Governor Raghuram Rajan.
Unveiling the first bi-monthly monetary policy for the current fiscal, Rajan said banks have already cut interest rates by 0.25-0.5 per cent and after Tuesday’s rate cut borrowings will become cheaper further.
Needless to say that RBI has effected a rate cut after a gap of 6 months. The last policy rate cut, of 0.50 per cent, was done in September 2015. RBI had last pegged the repo rate at 6.50 per cent in January 2011.
RBI has also introduced a host of measures to smoothen liquidity supply so that banks can lend to productive sectors, while indicating an accommodative stance going ahead.
Given weak private investment in the face of low capacity utilisation, a reduction in the policy rate by 0.25 per cent will help strengthen growth, he said.
The cut was broadly in line with expectations. However, investors were not enthused by RBI’s 25 bps rate cut as market benchmark Sensex plunged by 516 points, most in nearly two months, to crack below the 25,000-mark, with banking stocks taking a big knock. Participants said no change in Cash Reserve Ratio (CRR), also had its bearing on the sentiment.