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Loans May Get Cheaper As Shaktikanta Das-Led RBI Cuts Key Lending Rate

Today's RBI policy statement is the first under Governor Shaktikanta Das, who took charge in December last year.

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RBI Governor Shaktikanta Das said the decision to change the policy stance was unanimous

In a surprise move, the Reserve Bank of India (RBI) on Thursday reduced the repo rate by 25 basis points or 0.25 per cent. The central bank also changed its policy stance to "neutral" from "calibrated tightening". The repo rate - which is the key interest rate at which the RBI lends short-term funds to commercial banks - now stands at 6.25 per cent. The cut in repo rate may lead to lower EMIs for home and auto loan borrowers, say analysts. The central bank had last lowered the repo rate in August 2017. The government said the policy action would aid economic growth and employment opportunities.
Here are 10 things to know:
  1. Four of six members of the MPC voted to cut the rates, while all six voted for a change in the stance. 
  2. The central bank's decision on the shift to a "neutral" policy stance was broadly in line with economists' expectations. According to a January 24 Reuters poll, two-thirds of 65 economists expected the RBI to hold the repo rate at 6.50 per cent, while most respondents predicted the MPC to switch to a neutral stance. Nearly half of respondents expected a 25 basis point rate cut by mid-2019, according to the Reuters poll.
  3. The reverse repo rate stands adjusted to 6 per cent, the RBI said in its sixth bi-monthly policy statement for 2018-19. 
  4. The investment activity is recovering but supported mainly by public spending on infrastructure, said the Monetary Policy Committee, chaired by RBI Governor Shaktikanta Das. "The need is to strengthen private investment activity and buttress private consumption." 
  5. Asked whether the banks will pass on the lower interest rates to loan borrowers, Mr Das said: “The RBI meets (commercial) banks after the monetary policy meeting. The RBI to hold discussions with banks within next two-three weeks to discuss the interest rates… We only set policy rate… The decision on banks' interest rates remains with them.”
  6. Lauding the policy action by the RBI, Finance Minister Piyush Goyal said the move will boost the economy, lead to affordable credit for small businesses and homebuyers, and improve employment opportunities.
  7. The RBI lowered its consumer inflation forecast to 2.8 per cent for the quarter ending March 31, 2019, on account of favourable factors such as benign monsoon. The RBI also cut the retail inflation forecast to 3.2-3.4 per cent for the first half of 2019-2020, and  3.9 per cent for the third quarter. 
  8. Economists welcomed the surprise decision by the central bank to lower the key rates. "There was a space created by lower headline inflation and the RBI has used it to support financial activities,” said Rajni Thakur, economist, RBL Bank. "With lower projections of inflation and growth going forward, there are indications that MPC will look for opportunities for further cuts in the cycle." (What economists say)
  9. The RBI projected economic growth rate at 7.4 per cent in the next financial year. 
  10. The Dalal Street spiked after the release of the RBI policy statement, but climbed off the day's highest levels subsequently. The rupee weakened to 71.69 to the dollar immediately after the announcement but strengthened soon after to 71.42. (Stock market highlights)

(With agency inputs)





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Highlights

1
The central bank also changed its policy stance to "neutral"
2
The reverse repo rate under the LAF now stands adjusted to 6%
3
The marginal standing facility rate now stands adjusted to 6.5%

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