Home, auto loans set to be cheaper

RBI cuts repo rate by 0.25%

Home, auto and other loans are set to become cheaper with the RBI on Tuesday reducing the short-term lending rate by 0.25% to over 5-year low of 6.5%.  

Unveiling the first bi-monthly monetary policy for the current fiscal, RBI Governor Raghuram Rajan said banks have already cut interest rates by 0.25-0.5% and after Tuesday’s rate cut, borrowings will become cheaper further.

“Borrowing is cheaper...and will continue to do so,” Rajan said, adding that the introduction of marginal cost of funds-based lending rate (MCLR) system will improve monetary policy transmission.

The RBI has effected a rate cut after a gap of 6 months. The last policy rate cut, of 0.50%, was done in September 2015. The RBI had last pegged the repo rate at 6.50% in January 2011. The RBI has also introduced a host of measures to smoothen liquidity supply so that banks can lend to productive sectors, while indicating an accommodative stance going ahead.

The cut was broadly in line with expectations. However, the stock market reacted negatively and the BSE index, Sensex, was down by over 400 points. Rajan hoped that tranmission of rate cuts by banks will improve due to the new lending rate calculations. 
“Perhaps more important at this juncture is to ensure that current and past policy rate cuts transmit to lending rates. The reduction in small savings rates announced in March 2016, the substantial refinements in the liquidity management framework announced in this policy review and the introduction of the marginal cost of funds based lending rate (MCLR) should improve transmission and magnify the effects of the current policy rate cut,” Rajan said.

The stance of monetary policy will remain accommodative. The RBI will continue to watch macroeconomic and financial developments in the months ahead with a view to responding with further policy action as space opens up, Rajan added.

According to Rajan, the central bank does not need to maintain liquidity at a deficit. “Given the various measures that have been taken to fix the policy rate at close to repo rate through these overnight instruments, there is no longer a need to maintain liquidity at deficit,” Rajan said.