In its monetary policy review, the Reserve Bank of India has cut repo rate by 0.25 per cent. RBI’s move is set to further slash the interest rates and home, auto and other loans are set to become cheaper.
Even though the rate cut was broadly in line with expectations, the stock market reacted negatively. Sensex shed over 516 points to finally close at 24,883. Nifty too traded through the day in deep red to finally close 155 points down at 7,603.
The repo rate, at which RBI lends to the financial system, has now come down to 6.5 per cent. With this rate cut, the repo rate now stands at a five-year low.
“Borrowing is cheaper…and will continue to do so,” the RBI Governor said.
Given the 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, RBI Governor Raghuram Rajan said in the first bi-monthly monetary policy review for the 2016-17 fiscal.
RBI also introduced a host of measures to smoothen liquidity supply so that banks can lend to the productive sectors. Rajan narrowed the policy rate corridor to 0.50 per cent from the earlier 1 percentage point, which resulted in the reverse repo rate – at which banks can park excess funds with the RBI – being reset at 6 per cent.
The policy review stated that the average overnight borrowings by banks increased from Rs 1,345 billion in January to Rs 1,935 billion in March.
Rajan reaffirmed that the monetary policy will continue to remain accommodative to address the growth concerns. He said the inflation objectives are closer to being realised and price-rise will hover around the 5 per cent mark for the remainder of the fiscal.
RBI also retained its GDP growth forecast at 7.6 per cent, on the assumption of a normal monsoon and a boost to consumption through the implementation of the Seventh Pay panel recommendations. Rajan said he expects the implementation to hurt inflation by 1-1.5 per cent over a two year period, but the shock will not be as strong as that felt during the implementation of the Sixth Pay panel suggestions.
Rajan also welcomed the government move to amend the RBI Act to create a monetary policy committee, saying it will further strengthen the policy’s credibility. He also welcomed the government’s adherence to the path of fiscal consolidation.
Rajan had last cut the key rates at the September 2015 review by a surprising 0.50 per cent.
This time around, conducive government actions and macroeconomic data had increased the expectations of a rate cut. The government’s affirmation of sticking to the fiscal consolidation path in the budget by promising to bring down the fiscal deficit to 3.5 per cent in the current fiscal, and also a reduction in the small savings rates flagged by RBI in earlier policy announcements only bolstered the demands for the cut.
(With inputs from PTI)