RBI repo rate cut to make auto, home loan EMIs cheaper

EMIs for car, auto and personal loan borrowers will come down as the Reserve Bank announced 0.5 per cent cut in interest rates for the first time in three years to revive sagging growth, exceeding expectations.

As RBI reduced short-term lending (Repo) rates to eight per cent from 8.5 per cent with immediate effect, several banks led by SBI said, they would cut the lending rates.

While the RBI decision came as a pleasant surprise to the borrowers, who were expecting only 0.25 per cent reduction in the benchmark rate, depositors will earn less on savings.

Unveiling the credit policy for the current fiscal, RBI Governor D Subbarao said here that the decision to cut interest rate was necessitated by deceleration in growth and a drop in inflation of non-food manufactured products from 8.4 per cent in November 2011 to 4.7 per cent in March this year.

But, he cautioned, in view of persisting upside inflation risks particularly of food items, it may not be possible to cut rates further.

Moreover, if subsidies are not contained it will further reduce the policy space for monetary easing, he said.

The RBI has directed the banks not to insist on a minimum balance on basic saving bank accounts, and also not to charge for prepayment of home loans.

Finance Minister Pranab Mukherjee said the RBI policy would boost investment sentiment. The government will take more steps in this direction, he added.

As the country was grappling with inflation, the RBI had been following tight monetary policy with high interest rates causing hardship to borrowers.

In its macro-economic assessment, the RBI projected the economic growth of 7.3 per cent for the current fiscal, higher than 6.9 per cent for 2011-12. It expects inflation to be 6.5 per cent by March, 2013.

The industry and the stock market, welcomed the credit policy.