JOIN USHome, auto loans to get cheaper
Signalling that bank loans needed to get cheaper to spur investment and growth in India’s stuttering economy, the Reserve Bank of India on Thursday cut the key policy repo rate by 25 basis points, the third time in less than six months.
Governor Shaktikanta Das assured the move would translate into faster reduction in auto and home loans rates.
Interest rate changes are usually described in basis points. One hundred basis points make one percentage point.
India’s demand-driven economy has slowed to a five-year low in 2018-19 due to declining private consumption, slower investments and muted exports. To revive growth immediately, it is important for people to start their discretionary spending. Cheaper bank loans can help do that.
With Thursday’s cut, the repo rate or the rate at which banks borrow money from RBI, came down to 5.75% from 6.50% in the beginning of 2019.
“The 75 bps cut in the calendar year will translate into higher and faster transmission and the impact will be seen on consumer durable and two-wheeler loans as well,” Das said in a post policy press conference.
The latest cut in the repo rate came after India’s GDP growth slowed to a five-year low of 6.8% in 2018-19 and unemployment rate accelerated to a 45-year high of 6.1%. All high-frequency growth indicators, including vehicle sales, fell to a multi-quarter low.
Along with the rate cut, Das also reassured that businesses would not face any cash crunch as the RBI was monitoring the liquidity situation closely to ensure there was adequate cash in the system.
After remaining in deficit during April and most of May due to restrained government spending, liquidity in the system turned into an average daily surplus of Rs 66,000 crore in early June.
In order to regain the confidence of investors in the Indian economy, he made it clear that any further rate hike by the monetary policy committee (MPC) was off the table for now. In fact the MPC changed its policy stance from ‘neutral’ to ‘accommodative’, suggesting a rate reduction is likely should economic conditions warrant.
Markets, which had priced in the 25 bps rate cut, reacted positively to the change in stance with the yields on 10-year government bonds falling to 6.89% from 7% and the rupee strengthening by about 8 paise to 69.28 to a dollar. Bond market is an important indicator of the health of an economy. The MPC voted unanimously to the rate cut and a change in stance after the RBI acknowledged that there was a slowdown in economic activity along with a continuing moderation in private consumption growth.