Interest rates likely to fall after surprise cut by RBI

Mumbai: The Reserve Bank sprang a surprise Thursday by cutting its benchmark lending rate by 0.25 per cent to 6.25 per cent. It also changed its monetary stance to “neutral” from “calibrated tightening”, signalling the beginning of a lower interest rate cycle. It may also lower EMIs for homebuyers.

Justifying the decision to slash its key rate, which was contrary to market expectations of a status quo, RBI governor Shaktikanta Das, who chaired the Monetary Policy Committee for the first time after he took over as RBI governor from Urjit Patel, said: “The RBI Act mandates that the Monetary Policy Comm-ittee focus on growth after meeting its inflation objective. With headline inflation expected to remain below the mid-point of the MPC’s target of four (plus-minus two) per cent, the committee believes the space has opened up for lower rates.”

While the RBI cut its rate, much will depend on what big banks like SBI, PNB, Bank of Baroda, ICICI Bank and HDFC do as competition will force the rest to follow suit. Depositors, however, need not worry as the banks, in their bid to garner more deposits, are unlikely to cut rates steeply.