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RBI cuts repo rate by 25 basis points

MUMBAI:  In a pleasant surprise, RBI on Thursday cut its policy rate by 0.25 per cent in the first reduction in 20 months and promised more, paving way for cheaper home and auto loans as also lower cost of funds for corporate borrowers.

While the government, industry and stock markets cheered RBI’s much-awaited move, state-owned Union Bank and United Bank within hours lowered their respective benchmark lending rates by similar margin, giving relief to borrowers.

Others, including the PSU giant SBI and private sector major ICICI Bank indicated they will look at rate cuts soon to pass on the benefit to their customers from RBI’s lowering of repo rate, at which banks borrow from the central bank.

“Reduction in the rates is a positive development. It will lead to more money in the hand of the consumers and greater spending. It’s positive for the Indian economy,” said Finance Minister Arun Jaitley, who has been nudging RBI for a rate cut for months now.

The industry has also been demanding an interest rate cut to lower their cost of capital and help revive the investment cycle.

Jaitley said the RBI decision would “certainly help in reviving investment cycle that the government is trying to restore”.

The RBI cut the repo rate by 25 basis points to 7.75 per cent with immediate effect, cheering the stock markets where the benchmark Sensex soared by 847 points to 28,194 points during the intra-day trade.

RBI had last reduced the repo rate on May, 3, 2013, when it was lowered from 7.5 per cent to 7.25 per cent. Thereafter, the rates went higher and had remained steady at an elevated level of 8 per cent since January 2014.

RBI Governor Raghuram Rajan, who had been maintaining a hawkish stance till now, decided to go in for rate cut a fortnight ahead of the scheduled date of announcement of monetary policy review on February 3.

The surprise early morning move, before the markets opened, came amid softening inflation levels and a reiteration by the Finance Ministry to stick to its fiscal deficit target of 4.1 per cent for the current financial year.

Commenting on the rate cut, SBI Chairman Arundhati Bhattacharya said the country’s largest lender “will look at how and when base (lending) rates can be cut”, while ICICI Bank CEO Chanda Kochhar said that the much-awaited lowering of lending and deposit rates would definitely take place now.

As a result of the rate cut, the reverse repo rate, the rate at which the central bank drains excess liquidity from the banking system, also moved down by 25 basis points to 6.75 per cent.

The RBI, however, has decided to keep the cash reserve ratio, the portion of deposits which the banks are required to have in cash with the central bank, unchanged at 4.0 per cent.

Rajan had during the previous monetary policy review on December 2 hinted at a possible easing in rates early in 2015, including outside of planned meetings.

Elaborating on the price situation, a RBI statement said “inflation outcomes have fallen significantly below the 8 per cent targeted by January 2015. On current policy settings, inflation is likely to be below 6 per cent by January 2016.”

Lower-than-expected inflation has been enabled by decline in prices of vegetables and fruits, cereals and the large fall in international commodity prices, particularly crude oil, it said, adding barring geo-political shocks, they are expected to remain low over the year.

Welcoming the rate cut, FICCI president Jyotsna Suri said, “This measure will help in improving the investor sentiment. FICCI hopes that this will be the beginning of further cuts in the policy rate by the central bank, and will enable its transmission into lower lending rates by the banks.”

CII director general Chandrajit Banerjee said  the reduction in repo rate has come as a positive surprise in the new year and would be a huge mood lifter for investors who have been grappling with subdued demand conditions.

Automobile manufacturers, however, were not too happy with the 25 basis points rate cut saying it was “too little, too late”.

According to General Motors India vice-president P Balendran: “While this is definitely a welcome move, but it is too little too late. We were expecting a rate cut of 50 basis points.”

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