Home, auto loans to be cheaper as RBI cuts repo rate

Inflation fall holds key to further cuts, says Rajan

Home, auto loans to be cheaper as RBI cuts repo rate

The Reserve Bank of India (RBI), in a surprise move, on Thursday cut the key repo rate — the rate at which the central bank lends short-term money to commercial banks against government securities — by 25 basis points to 7.75 per cent.

The reverse repo rate (the rate at which the RBI borrows money from commercial banks) was also reduced by 25 basis points to 6.75 per cent from 7 per cent with immediate effect.

The central bank, however, maintained the cash reserve ratio (the percentage of deposits which commercial banks are required to park with the RBI in cash) at 4 per cent .

Easing inflation, the decline in crude oil price, and the government’s commitment towards its fiscal deficit targets were some of the reasons behind the move, RBI Governor Raghuram Rajan said in a statement.

Consumers can soon expect a rate cut in home and auto loans. While the government, industry and stock markets cheered the 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.

The RBI had stated in its fifth bi-monthly monetary policy statement in December that “if the current inflation momentum and changes in inflation expectations continue and fiscal developments are encouraging, a change in the monetary policy stance is likely early next year.”

The next monetary policy review was due on February 3, but in the past week two reports confirmed that inflation was  declining. The wholesale price inflation is close to zero. And consumer price inflation stood at 5 per cent in December. That offered headroom for the RBI to act now.

Bankers, who were expecting a rate cut very soon by the central bank, say the RBI move would strengthen the economy further.

 State Bank of India chairperson Arundhati Bhattacharya welcomed the move and said: “With global crude and commodity prices expected to be benign, and inflationary expectations moderating to single digits, the current disinflationary impetus is likely to be firmly entrenched.

We thus believe that this cut may be just the beginning of a rate easing cycle.”
ICICI Bank Managing Director Chanda Kochhar said:

“The rate cut by the RBI was widely anticipated and is a welcome move. Together with the various initiatives being taken by the government, the rate cut would strengthen the positive momentum in the economy by lowering borrowing costs as the lower rate regime finds its reflection in bank funding costs over time.”

 Kotak Mahindra Bank President (Consumer Banking) Shanti Ekambaram said: “This has been long awaited by all constituents of markets and industry.

The recent sharp fall in crude prices, the significant drop in CPI (consumer price index) and WPI (wholesale price index), and emerging global deflationary worries were factors that perhaps prompted the rate cut. The next major focus is likely to be the budget and the fiscal scorecard it presents,”
DH News Service

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