In its monetary policy review, RBI adjusted the repo rate by 50 basis points from 7.25 per cent to 6.75 per cent with immediate effect. Repo rate is now at a 4-year low.
The repo rate is the rate at which RBI lends to the system and the reverse repo rate is the rate at which it accepts banks’ excess liquidity. This will now stand at 5.75 per cent. However, the Cash Reserve Ratio (CRR) has been left unchanged at 4 per cent.
With a cut in interest rates, home loans and corporate loans are expected to cost less. This cut of 0.50 per cent is the biggest rate cut in over three years.
Within minutes of the RBI policy announcement, Andhra Bank cut its benchmark lending rates by 0.25 per cent. SBI too followed and cuts its lending rate by 0.40 per cent to 9.3 per cent. More banks are likely to follow suit.
Some banks are expected to cut interest rates very soon, said RBI director Raghuram Rajan while announcing the rate cut. This is the fourth policy rate cut by Rajan this year and it takes up the cumulative rate cuts to 1.25 per cent.
“Banks should be able to pass on the entire rate cut of 1.25 per cent this year to borrowers over time,” said Rajan after reviewing the monetary policy.
“We want to make sure that word sustainable and growth go together. Both are important. And that’s why we used what room we had. But I don’t think we were excessively aggressive. We were not throwing out Diwali bonus,” explained Rajan.
“RBI rate cut will help economic recovery process…I want to see the transmission of these cuts now,” said Finance Minister Arun Jaitley in a press conference in Delhi.
Of late, the RBI has been under pressure from various quarters, including the government, to give a rate-cut fillip to the sagging growth. RBI’s move comes after it cut India’s growth projection by 0.2 per cent – from 7.6 per cent to 7.4 per cent for the current fiscal.
“Further monetary policy accommodation will be conditioned by the abating of recent inflationary pressures, the full monsoon outturn, possible Federal Reserve actions and greater transmission of its front-loaded past actions,” said Rajan.
According to Rajan, inflation is likely to go up from September for a few months. He said, inflation is likely to reach 5.8 per cent in January 2016, a shade lower than the August projection.
“Continuing policy implementation, structural reforms and corporate actions leading to higher productivity will be the primary impetus for sustainable growth,” Rajan said.
He made it clear that the RBI has “front-loaded policy action by a reduction in the policy rate by 0.50 per cent”, and this action shall ensure that the real interest rates will continue to be in the 1.5-2 per cent band.
Rajan reiterated the need for banks to pass on the benefits to their lending rates. He also added that with this cut, the focus of the monetary policy will now shift to working with the government to remove impediments to pass a bulk of the cumulative 1.25 per cent cuts to borrowers.
Banks have so far passed only an average of 0.30 per cent to the borrowers as against RBI’s 0.75 per cent cut and blame the delays in repricing of deposits for the lag. He added that deposit rates have “reduced significantly” and further transmission “is possible”.
Meanwhile, Indian markets cheered RBI’s boost to the economy. Sensex and Nifty continued to stay in the green, wiping off big initial losses. Sensex jumped 161.82 points to end the day at 25,778.66. Nifty climbed 47.60 points to close at 7,843.30.
The next bi-monthly monetary policy review, the fifth this year is scheduled to take place on December 1.
(With inputs from PTI)