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.
Ajay Verma, founder and writer of TheHousingWorld, a real estate and mortgage news website. He has over fifteen years of rich experience in the above mentioned industries.