The Reserve Bank of India (RBI) on Wednesday finally cut interest rates, in line with what the Street was expecting. Repo rate - the rate at the which the central bank lends short-term money to banks - was cut by 25 basis points to 6 per cent from 6.25 per cent. RBI's move comes on the back of inflation running well below its target for consecutive quarters. The central bank had last cut key rates in October 2016. The current rate of 6 per cent is the lowest since November 2010.
"There is scope for banks to reduce lending rates," RBI governor Urjit Patel said post the policy, in a cue to commercial banks to pass on the rate cut to consumers.
A significant moderation in retail inflation over the past three months had reinforced calls for further monetary policy easing from the RBI, which changed its stance to neutral from accommodative at the beginning of the year. The central bank on Wednesday said it would retain its neutral stance, warning it expected inflation to rise but pinning further moves on the economic data.
Weak consumer spending following the Narendra Modi-government's ban on high-value currency notes of Rs 500 and Rs 1,000 denomination late last year as well as lower food prices have kept inflation below the RBI's 4 per cent mid-term target for the past eight months. Inflation eased to its slowest pace in more than five years in June.
It was slumping inflation that allowed the RBI to provide a booster shot to India's economy which has been growing at its slowest pace in over two years.
The quantum of cut on Wednesday was however not unanimous. Four members of RBI's monetary policy committee voted to cut rates by 25 basis points, one voted for a 50 basis points cut and one voted for leaving rates unchanged.
The RBI also cut reverse repo rate -- the rate at which the central bank borrows money from commercial banks by 25 basis points to 5.75 per cent from 6 per cent. Marginal Standing Facility (MSF) rate -- the rate at which banks borrow overnight funds from RBI against approved government securities -- and the bank rate were also adjusted to 6.25 per cent.
After Wednesday's rate cut, the RBI is forecast to remain status quo in its policy at least until 2019 because economic growth is set to accelerate, according to a Reuters poll. Indian stocks are trading at a record high, partly in anticipation of that. However Arihant Capital's whole time director Anita Gandhi says, "If RBI gets confirmation that inflation will remain in the lower territory, there is a possibility of a further rate cut."
"The markets had already factored in a 25 basis points cut in rates by the RBI today," Sanjiv Bhasin, Executive VP- Market & Corporate Affairs, IIFL told timesofindia.com, adding that if banks are to pass it on to consumers, it is likely to happen over a period of time as their margins are already under pressure which is evident from SBI (State Bank of India) cutting deposit rates on savings bank accounts earlier this week. The country's largest lender cut interest rate on savings bank accounts on Monday to 3.5 per cent from 4 per cent on balance of Rs 1 crore and below. About 90 per cent of SBI's savings bank accounts have balances under Rs 1 crore.
It is likely to be a Catch-22 situation for the banks as while margins are a concern, loan growth continues to be weak and they would feel the pressure to pass on any rate cut.
Earlier this week, on Monday while cutting deposit rates, SBI also informed the stock markets that it had cut MCLR (marginal cost of funds based lending rate) or its key lending rate, by 90 basis points effective January 1, 2017, on the strength of large inflows in savings and current accounts after demonetisation. "There has been significant outflow of CASA (current account and savings account) deposits. The revision in savings bank rate would enable the bank to maintain MCLR at the existing rates, benefitting a large segment of retail borrowers in SME, agriculture and affordable housing segments," SBI had said.
In June, SBI cut its lending rate for home loans above Rs 75 lakh 10 basis points (0.10 per cent). The revised interest rates stands at 8.55 per annum for salaried women borrowers, while for others the rate of interest is 8.60 per cent per annum. The move was on the heels of RBI reducing the risk weightage on home loans above Rs 75 lakh to 50 per cent from 75 per cent. In May, the bank cut rates on home loans of up to Rs 30 lakh by 25 basis points (0.25 per cent) for new borrowers in a bid to cash in on the demand generated by the Narendra Modi government's efforts to push for affordable housing. The rate was reduced to 8.35 per cent from 8.60 per cent. Earlier, in January the public sector lender had reduced its lending rates across the board making home, auto, personal and other cheaper
