The first rate cut from the RBI since 2013 will bring down its main lending rate to 7.75 per cent from 8 per cent earlier. Following the central bank's surprise move, the Sensex surged over 600 points to inch closer to 28,000 mark. The rupee also soared by 46 paise to trade at a fresh one-month high of 61.72 against the dollar. (Read)
Pratip Choudhuri, former chairman of State Bank of India, said banks are expected to lower their lending rates by 0.25 per cent following the RBI rate cut. Keki Mistry, Vice Chairman & CEO of HDFC, said banks have room to lower lending rates but may wait for a while before passing on the benefit to borrowers He sees the RBI cutting rates by 1 per cent during the course of the year.
With a near 60 per cent fall in global oil prices since last June and food prices remaining in check, there were expectations of a rate cut. "Since July 2014, inflationary pressures (measured by changes in the consumer price index) have been easing. These developments have provided headroom for a shift in the monetary policy stance," RBI governor Raghuram Rajan said in a statement.
The RBI rate cut comes just two weeks before its scheduled policy review on February 3. Sajjid Chinoy, India economist at JP Morgan, said he does not see a possibility of RBI cutting rates at its February meet. The central bank is likely to wait for the government's budget (likely in February-end) before taking further monetary easing measures, he added.
The finance ministry welcomed an inter-meeting rate cut by Reserve Bank of India on Thursday, saying it reflected easing inflation concerns and vindicated the government's efforts to achieve economic growth without stoking inflation. Deputy Finance Minister Jayant Sinha said the quarter-point rate cut would mark an "inflection point" after a period of high interest rates. (Read)