RBI surprises with rate cut; home, auto loans to cost less

New Delhi: Home, auto and corporate loans may get cheaper as the new RBI Governor Urjit Patel-led panel on Tuesday marked its debut policy review with a surprise 0.25 per cent rate cut -- lowering borrowing cost to 6-year low, which the industry lauded as a pre-Diwali gift. In independent India's first collective interest rate setting decision, the six-member Monetary Policy Committee, which has three members nominated by the government and the rest from the Reserve Bank, lowered repo rate to 6.25 per cent from 6.50 per cent. First in six months, Tuesday's cut came amidst big clamour for easing rates especially after the departure of former governor Raghuram Rajan, who was often accused by some sections, including those from the ruling BJP, of stifling growth by keeping rates too high. The repo rate, at which RBI lends to banks, was 6.25 per cent in November 2010. It peaked to 8.5 per cent in October 2011. Within minutes of the RBI policy announcement, the government welcomed the rate cut saying it will boost liquidity and help achieve 8 per cent GDP growth. "The government has announced several measures to cool food inflation pressures, especially with regard to pulses. These measures should help in moderating the momentum of food inflation in the months ahead. This has opened up space for policy action, as indicated in the third bi-monthly monetary policy statement," Patel said in the fourth bi-monthly monetary policy review for 2016-17. RBI's current rate cut along with reduction in small savings rates by the government will encourage banks to pass on the benefit to the borrowers, he said. "The easy liquidity conditions engendered by the Reserve Bank’s operations should also enable the smooth transmission of the policy action through various market segments," he said. Following the rate cut, the BSE benchmark Sensex closed up by 91 points at 28,334.55. Finance Secretary Ashok Lavasa said the RBI policy will boost liquidity in the system and both the RBI and government are in sync with the inflation target. "On the whole, this is a decision which will go down well with all sections of the economy," Lavasa said. When asked if banks will pass on rate cut, he said: "It depends on the banks. Banks also decides based on market sentiment". Welcoming the rate cut as a 'pre-Diwali' gift, industry players hoped that banks would pass on the benefits and boost consumer sentiments in the ongoing festive season. On transmission, State Bank of India Managing Director P. K. Gupta said: "I think policy rate is on expected line. The bank has already cut rates. Deposit rates were cut recently. Lending rate cuts are happening every month. And RBI also said that transmission is happening." RBI has reduced key interest rate (repo rate) by 175 basis points since January 2015. However, the banks have been reluctant to pass on the entire benefits to consumers. With Tuesday's reduction of benchmark policy rate, all other rates -- reverse repo rate, bank rate, Marginal Standing Facility stand reduced by similar percentage points to 5.75 per cent, 6.75 per cent and 6.75 per cent respectively. The rate-setting panel, MPC, took note of potential cost push pressures that may emerge, including the 7th pay commission award, on house rent allowances, and the increase in minimum wages with possible spillovers through minimum support prices.The fuller play of these factors will need vigilance to prevent a generalised cost spiral from taking root, it said. "On balance, the Committee envisages a trajectory taking headline CPI inflation towards a central tendency of 5 per cent by March 2017, with risks tilted to the upside albeit lower than in the second and third bi-monthly monetary policy statements of June and August respectively," Patel said. On the GDP forecast, he said, the momentum of growth is expected to quicken with a normal monsoon raising agricultural growth and rural demand, as well as by the stimulus to the urban consumption spending from the pay commission's award. The accommodative stance of monetary policy and comfortable liquidity conditions should support a revival of credit to the productive sectors, he said, adding, the continuing sluggishness in world trade and smaller terms of trade gains than in the past point, however, to further slackening of external demand going forward. Accordingly, the projection of growth of real gross value added (GVA) for 2016-17 is retained at 7.6 per cent, with risks evenly balanced around it. The decision of MPC is consistent with an accommodative stance of monetary policy in consonance with the objective of achieving consumer price index (CPI) inflation at 5 per cent by Q4 of 2016-17 and the medium-term target of 4 per cent within a band of +/- 2 per cent, while supporting growth, he added. It is to be noted that all the six members voted in favour of the rate cut decision.