RBI cuts key rate 0.25 per cent, loans might get cheaper

Mumbai: In line with market expectations, the monetary policy committee (MPC) of the Reserve Bank of India (RBI), in its second bi-monthly monetary policy review for the fiscal, on Thursday cut the benchmark repo rate by 25 basis points (bps) and changed its stance to “accommodative” from “neutral”.

Today’s rate cut comes as a relief to borrowers as equated monthly instalments (EMI) for home loans, car loans and other loans are set to come down. However, depositors would earn less on their bank investments.

The repo rate is the rate at which commercial banks borrow money from the RBI in case of a shortage of funds and is one of the main tools of the RBI to keep inflation under control.

Speaking to reporters at the policy press conference, RBI governor Shaktikanta Das said, “The stance has been changed to accommodative. An accommodative stance means that rate hikes are (now) off the table.”

All the six members of the MPC voted in favour of a rate cut as well as change in policy stance. Consequently, the repo rate now stands at 5.75 per cent, the lowest since September 2010. This is the third rate cut by the RBI since February and takes the cumulative reduction in the ongoing rate easing cycle to 75 basis points. One basis point is one hundredth of a percentage point.

The RBI again cut its GDP growth forecast for the current fiscal (FY20) by 20 basis points to 7 per cent — pegged at 6.4-6.7 per cent in fiscal first half (H1) and 7.2-7.5 per cent in the second half (H2) — owing to weak investment activity, weak global demand and moderation in private consumption.

In the last two policies, the RBI has cut its growth forecast by 40 bps. The central bank raised its inflation projection marginally to 3.0-3.1 per cent year-on-year (YoY) from 2.9-3 per cent in H1 FY20 and lowered it to 3.4-3.7 per cent from 3.5-3.8 per cent in H2 FY20.

However, there are risks related to monsoon, vegetable prices, crude oil, geopolitical tensions, financial market volatility and the fiscal scenario, the RBI said.

The bond market reacted positively to the policy statement as the benchmark 10-year government securities yield rallied from 7.4 per cent a month back to 6.9 per cent amidst high trading volumes during the day, presumably driven by the change in stance.

According to experts, the rate reductions and the accommodative stance, along with liquidity injections from the RBI, will help banks lower their lending rates. While the past repo rate cuts from the RBI have partially been transmitted by banks to new borrowers, for the old borrowers, the rates have rather gone up.

According to the monetary policy statement, the transmission of the cumulative reduction of 50 basis points in the repo rate in February and April policy was 21 bps on new loans. However, for old borrowers, the lending rate increased by 4 basis points as the past loans continue to be priced at high rates.

State Bank of India, the country’s largest lender by assets, has cut its marginal cost of funds based lending rate (MCLR) by a mere 10 basis points in response to the 50 bps rate reductions by the RBI in February and April. MCLR is the minimum interest rate that a bank will charge on loan and it directly impacts one’s EMIs.

Anil Gupta, sector head, financial sector ratings at ICRA, said, “With 50 bps decline in benchmark government yield during last month, we expect the government to induce a cut in rates for various small saving schemes in coming quarterly review of these rates.”

This coupled with the RBI’s stance of maintaining neutral liquidity shall enable banks to induce cut in their deposit rates and transmit the same in their lending rates. With the change in policy stance to accommodative, the downward revision in inflation estimates and slowing GDP growth, there appears to be a possibility of a cut in policy rates in coming quarters”.