Shedding its hawkish stance after 18 months, the Reserve Bank of India on Thursday sprang a surprise affecting a 0.25 per cent cut in interest rate that sent the markets soaring and raised expectations of lower EMIs for home and auto loans in the near future.
Though resisting nudges from the government and demands from the industry for long, the central bank decided to cut the benchmark lending rate or the repo rate a fortnight ahead of the scheduled monetary policy review on February 3, apparently on the back of a softening inflation.
The rate cut announcement was cheered by the stock markets with the BSE Sensex jumping over 600 points in early trade. The NSE index too moved up 176 points to trade above the 8,400-mark.
“It has been decided to. . . reduce the policy repo rate under the liquidity adjustment facility (LAF) by 25 basis points from 8.0 per cent to 7.75 per cent with immediate effect,” the Reserve Bank said in a statement.
The RBI had reduced the repo rate last time in May, 2013 when it cut the rate from 7.5 per cent to 7.25 per cent. Ever since, the rates have been going up and remained at 8 per cent since January 2014.
The rate follows decline in inflation as well as the commitment of the government to stick to the fiscal deficit target of 4.1 per cent of the GDP in the current financial year.
“These developments have provided headroom for a shift in the monetary policy stance,” the RBI said.
Analysts believe that today’s decision could pave the way for cutting retail lending rates that could see a reduction in the monthly payments on home, auto and other consumer loans.
Elaborating on the price situation, the RBI said, “Inflation outcomes have fallen significantly below the 8 per cent targeted by January 2015. On current policy settings, inflation is likely to be below 6 per cent by January 2016.”
Lower-than-expected inflation has been enabled by decline in prices of vegetables and fruits, cereals and the large fall in international commodity prices, particularly crude oil, it said, adding barring geo-political shocks, they are expected to remain low over the year.
The RBI, however, has decided to keep the cash reserve ratio (CRR), the portion of deposits which the banks are required to have in cash with the central bank, unchanged at 4.0 per cent.
The RBI said that it would continue with daily variable rate repos and reverse repos to smoothen liquidity.
The central bank, it added, will “provide liquidity under overnight repos at 0.25 per cent of bank-wise NDTL at the LAF repo rate and liquidity under 7-day and 14-day term repos of up to 0.75 per cent of NDTL of the banking system through auctions.”
Jaitley hails RBI decision to cut interest rate
Finance Minister Arun Jaitley hailed that the decision of RBI to cut the interest rate, saying it is positive for the Indian economy and will certainly help in reviving the investment cycle the government is trying to restore.
“The RBI decision to cut the interest rate will lead to more money in the hands of the consumer for greater spending.”
“It is positive for the Indian economy and it will certainly help in reviving the investment cycle the government is trying to restore,” said Jaitley who has been nudging the central bank to ease the interest rate to lower the cost of capital.
Earlier in the day, the RBI cut interest rate by 0.25 per cent to 7.75 per cent.