RBI Cuts Repo Rate By 0.25%, Home Loans May Become Cheaper

RBI Cuts Repo Rate By 0.25%, Home Loans May Become Cheaper

RBI Cuts Repo Rate By 0.25%, Home Loans May Become Cheaper

Published on: Oct 5, 2016 @ 19:58

The  Reserve  Bank  of  India  in  its  monetary  policy  review  on  Tuesday  cut  the  repo  rate by 0.25  percent  to 6.25  percent  from  6.50  percent.  The  decision  to  slash  repo  rate  (the rate at which  banks  borrow  from  the RBI)  by  25  basis  points  was  taken  by the  newly-constituted Monetary  Policy  Committee  (MPC)  headed  by RBI  Governor  Urjit  Patel  in its  maiden  policy  review.  With  this  rate  cut,  the  repo  rate  is  now  at  its lowest level  since  November 2010. The  move  is  likely  to  make  housing  and  auto  loans  cheaper  for  the  borrowers.

This  RBI  monetary  policy  review  was  the  first  under  its  Governor  Urjit  Patel  who  took  over  from  Raghuram  Rajan  last  month. This  is  also  the  first  instance  in  the  history  of  the central  bank  that  the  decision-making  power  on  interest  rate  cuts  has  been  bestowed  upon to  the  six-member  committee. This  six-member panel  is  called  Monetary  Policy Committee (MPC).  So  far,  the  decision  to  cut  repo  rate  was taken  by  the  RBI  governor.

The  MPC  has  been  constituted  to  help  and  enhance  the  process  and  quality   of  monetary policy  making  in the  country.  The  Committee  has  equal  representation  from  the  Bank  and  the  central  government. All  six members  of  MPC  voted  for  rate  cut  in  a  unanimous  decision.The  governor  still  gets  a  deciding  vote  if  the  panel  is  evenly  split.

The  RBI  has  reduced  repo  rates,  citing  falling  inflation  as  the  main  reason  for  the  move. Retail  inflation eased  to  a  five-month  low  of  5.05  percent  in  August,  within  the  committee’s 2-6  percent  objective. The  government  had  in  August  notified  4  percent  inflation  target  with  a  range  of  plus  or  minus  2  percent  for  the  next  five  years  under  the  monetary  policy  framework  agreement  with  the RBI.

“The  committee  expects  that  the  strong  improvement  in sowing  along  with  supply management  measures  will improve  the  food  inflation  outlook. The  government  has announced several  measures  to  cool  food  inflation pressures,  especially  with  regard  to pulses,” the  RBI said  in  a  statement. The  present  retail  inflation  is expected  to  ease  further in the  months ahead after  a  good  monsoon  has  sent food  prices  sharply lower. These  measures are  expected  to ease further  the  food  inflation  in  the  months  ahead.

On  economic  growth,  the  RBI  said  it  would  continue  with  its  accommodative  monetary stance  and  continue the  growth  momentum  in  the  economy. “The  momentum  of  growth  is expected  to  quicken  with  a  normal monsoon  raising  agricultural  growth  and  rural  demand, as well as  by  the  stimulus  to  the  urban  consumption spending  from  the  pay  commission’s award,” it  said. The  RBI  retained  its  GDP  growth  projection  for  this fiscal  year  at  7.6 percent. Now, India  finds  its  place  among  the  world’s  fastest-growing  economies.

On  the  impact  of  GST  on  inflation, the  RBI  said  that  it  would  largely  depend  on  the standard  rate  decided  by  the  GST  council.

Finance  Secretary  said  the  0.25  per cent  rate  cut  by  the  RBI  will  inject  liquidity  into  the system  and improve  the  growth  rate  in  the  current  fiscal. Liquidity  conditions  have  remained comfortable  in  the  third quarter, with  the  Reserve  Bank  absorbing  liquidity  on  a  net  basis through  variable  rate  reverse  repo  auctions of  varying  tenors.

Terming  0.25  percent  rate cut  as  positive  for  the  economy,  the  Finance Ministry  today expressed  hope  that banks  will  pass  on  the  benefit  to  borrowers. RBI  also  nudged  banks  to  take  a  cue  in  small  saving  schemes  and  pass  on  the  benefit  of  rate  cut  to  borrowers.

However,  banks  have  so  far  retained  the  gains  from  the  repeated  reduction  in  repo  rates  by  RBI  and improved  their  net  interest  margin. Some  experts  see   the  low  growth  in  loan disbursement  as  one  of  the reasons  behind  the  reluctance  of  banks  to  pass  on  the  benefits  of  the  rate  cut. However, Banks  are  expected to  pass  on  the  RBI  rate  cut  to  borrowers sooner  the  better.

 

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