RBI snips repo rate by 25 bps

Home, auto loans to become cheaper

RBI snips repo rate by 25 bps

Home and auto loans will become cheaper as the Reserve Bank of India (RBI) has cut the repo rate by 25 basis points and brought it down to 7.25 percent.

Within hours of the announcements by RBI Governor Raghuram Rajan, state-owned banks State Bank of India, Allahabad Bank, Punjab and Sind Bank, and Dena Bank took the lead in cutting their base rates or minimum lending rates.

SBI cut the base rate to 9.70 per cent from 9.85 per cent effective June 8, Allahabad Bank cut it by 0.30 per cent, while Dena Bank and Punjab & Sind Bank reduced their base rates by 0.25 per cent each.

With the reduction, all loans linked to the base rate — including home and auto loans — would come down proportionately.

Rajan acted along expected lines in the second bi-monthly monetary policy review. This is the third rate cut by the central bank this year and the cumulative rate cuts by the RBI now stand at 75 basis points for the year so far.

In the policy review statement, Rajan had made it clear in no uncertain terms that “banks should pass through the sequence of rate cuts into lending rates”.

The RBI, however, kept the cash reserve ratio (CRR) — the portion of deposits that banks must mandatorily keep with the RBI — unchanged at 4 per cent. Reverse repo rate and marginal standing facility have been revised to 6.25 per cent and 8.25 per cent respectively.

The RBI also cut the projection for output growth for 2015-16 to 7.6 per cent from 7.8 per cent in April with a downward bias to reflect the uncertainties surrounding various risks.

Brokerages as well as economists had expected a 25 bps rate cut by Rajan.

The heads of industry bodies felt the rate cut was “too little, too late”, saying they had expected a deeper cut by 50 basis points (BPS).

The government, though, welcomed the move, with chief economic advisor (CEA) Arvind Subramanian saying that the rate cut showed that the economy is still in need of “policy support” as it recovers.

“With low domestic capacity utilisation, still mixed indicators of recovery, and subdued investment and credit growth, there is a case for a cut in the policy rate,” Rajan said in his statement.

He, however, talked about the inflation risks, and the need for astute food management from the government.

“Therefore, a conservative strategy would be to wait, especially for more certainty on both the monsoon outturn as well as the effects of government responses if it turns out to be weak,” he said.

“With still weak investment and the need to reduce supply constraints over the medium term to stay on the proposed disinflationary path (to 4 per cent in early 2018), however, a more appropriate stance is to front-load a rate cut today and then wait for data that clarify uncertainty,” he added.

Rajan also clarified that the RBI was under no pressure from the Finance Ministry to announce a rate cut. “I don’t think the premise is right that the government has been putting burden on the RBI. The government has been acting on its own to try and reduce bottlenecks, create new pathways for growth. We both play together and as far as the rate cut is concerned, it is an attempt to ease the way for further investment to reduce medium-term supply constraints,” Rajan said.

Stressing the fact that the policy actions by the RBI will be data contingent, Rajan did not rule out further rate cuts.

He also signalled that the growth rate may be weaker than what the headline numbers (GDP growth) suggest.

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