As the rate cut clamour got louder, especially from the India Inc, the Reserve Bank of India (RBI) on Wednesday finally blinked and reduced benchmark lending rate or repo rate by 25 basis points (bps) after a ten-month long pause. The repo rate is now down to 6 per cent, the lowest in more than six years.
The RBI’s move is likely to prompt banks to pass on the benefit to consumers by lowering interest rates on home, auto and corporate loans. However, industry said the cut is ‘too little’ for them to get the benefit.
Apart from the repo rate at which RBI lends to banks, the RBI has also cut the reverse repo rate, at which RBI borrows from banks, by 25 bps to 5.75 per cent. Also, it has cut the marginal standing facility (MSF) rate by the same 25 bps to 6.25 per cent as well. Despite a cut in the benchmark lending rate, the RBI retained its GDP forecast to 7.3 per cent this fiscal.
With the RBI’s move, the stock market shrugged off and slipped to red from record highs on Wednesday, because the share markets have largely factored in the rate cut. The BSE index Sensex plunged by 98.43 points and closed at 32,476.74, while NSE Nifty fell 33.15 points to 10,081.50.
Appreciating the RBI’s decision, Economic Affairs Secretary Subhash Chandra Garg said it is an important step to sustain growth and moderate inflation. “We welcome the 25 basis points cut in the repo rate as an important step necessary to converge toward the appropriate real monetary conditions for sustained growth consistent with India’s potential and for stable, moderate inflation,” he said.
RBI had last cut the key lending rate by 0.25 per cent as Urjit Patel’s first monetary policy as RBI Governor in October 2016. That was also the first monetary policy which was decided by Monetary Policy Committee (MPC). “The decision of the MPC is consistent with a neutral stance of monetary policy in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 per cent within a band of +/- 2 per cent, while supporting growth,” Patel said after the third monetary policy review of the current fiscal in Mumbai.
On the rate of price rise, Patel said, “The MPC observed that while inflation has fallen to a historic low, a conclusive segregation of transitory and structural factors driving the disinflation is still elusive.”
However, RBI’s rate cut decision reportedly disappointed the India Inc as it was expecting a steeper cut to spur investment and growth in the country. However, eminent banker Deepak Parekh said the RBI’s decision to slash benchmark lending rate by 25 bps is a good move for the economy.
Industry chamber CII said the move will give a fillip to growth, especially at a time of benign core inflation print and tepid private investment. “Having said so, CII feels that a steeper cut in interest rate would have been more in consonance with market realities,” it said.
Echoing the similar sentiment, industry body FICCI also said the current situation warranted a steeper cut of 50 bps as the private investment cycle remains weak and the reduction in the rate will be an investment sentiment booster. While Assocham said that even though the 25 bps cut may not make much of a difference to the debt servicing burden of the borrowers, especially the over-leveraged corporates, it certainly improves the sentiment.
Harsh Pati Singhania, Vice Chairman and Managing Director of JK Paper, termed the RBI’s decision as ‘too little’. “While I believe RBI could have been more aggressive, the 25 bps cut will boost consumer sentiment especially for discretionary items like automobiles and white goods,” he said.
As far as inflation is concerned, the baseline projection is expected to rise from current lows. Patel said that the MPC decided to keep the policy stance neutral and to watch incoming data. “The MPC remains focused on its commitment to keep headline inflation close to 4 per cent on a durable basis,” he said, adding that there is an urgent need to reinvigorate private investments, clear infrastructure bottlenecks and provide a major thrust to the Pradhan Mantri Awas Yojana for affordable housing.
Patel said there is a scope for banks to cut rates further, especially for those sectors which have not benefited in the past rate cuts. The RBI is not fully satisfied with the MClR system and is studying that can move to a market-linked benchmark, he added.
Patel, however, noted that the MPC will continue monitoring movements in inflation to ascertain if recent soft readings are transient or if a more durable disinflation is underway. “In its assessment of real activity, the MPC noted that while the outlook for agriculture appears robust, underlying growth impulses in industry and services are weakening, given corporate deleveraging and the retrenchment of investment demand,” he said.
On bad loan front, the RBI said that it is working in close coordination with the Government to resolve large stressed corporate borrowings and recapitalise public sector banks. The banking sector in India is reeling under Rs 8 lakh crore of non-performing assets (NPAs) or bad loans, of which PSU banks alone account for over Rs 6 lakh crore.
Four MPC members -- RBI Governor, Deputy Governor Viral V Acharya, Chetan Ghate and Pami Dua were in favour of the monetary policy decision. However, another member Ravindra H Dholakia voted for a policy rate reduction of 50 basis points, while RBI executive director Michael Debabrata Patra voted for status quo.