RBI slashes repo rates, loans may become cheaper
The Reserve Bank of India (RBI) on Wednesday cut its key lending rate by 25 basis points to its lowest since November 2010, raising hopes of lower EMIs on home and car loans. The repo rate --- the rate at which the RBI lends to banks --- now stands at 6%. This is the first rate cut since October 2016.
The move came on expected lines as retail inflation fell to a more than five-year low of 1.54% in June, the main consideration for the RBI monetary policy committee (MPC).
Four members of the MPC voted for a 25 basis points reduction. Ravindra Dholakia, professor at IIM Ahmedabad wanted a 50 bps cut, while Michael Patra, executive director at RBI, wanted to hold rates.
Some of the upside risks to inflation such as core inflation, poor rains and adverse impacts from the rollout of the GST have not materialised, the panel noted. “Consequently, some space has opened up for monetary policy accommodation, given the dynamics of the output gap. Accordingly, the MPC decided to reduce the policy repo rate by 25 basis points. Noting, however, that the trajectory of inflation in the baseline projection is expected to rise from current lows, the MPC decided to keep the policy stance neutral and to watch incoming data. The MPC remains focused on its commitment to keeping headline inflation close to 4 percent on a durable basis,” the monetary policy statement said.
Retail inflation at 1.5% in June was lower than RBI’s April-September forecast of 23.5. The slowing of inflation is mainly due to falling food prices and a statistical base effect. However, even core inflation, which excludes food and fuel, has declined in the past two readings after remaining sticky for a while. However, the panel isn’t fully convinced about whether inflation has structurally moved lower.
The cut was also the first since the government’s shock withdrawal of high-denomination currency notes in November and unveiling of the goods and services tax last month. The panel, in its previous bi-monthly review in June, retained the repo rate at 6.25% for the fourth straight time citing risk to inflation.
On Tuesday, the State Bank of India --- the country’s largest lender and market leader --- reduced interest rate on savings bank deposits by 50 basis points, putting pressure on the RBI to go for the rate cut.
RBI Governor Urjit Patel Wednesday said inflation is expected to rise from record lows even as the central bank opted for a cut in key lending rate to a 6.5year low "to reinvigorate private investment" and resolve the issue of mounting bad loans amid weak corporate balance sheets. The 0.25 per cent lowering of the repo rate to 6 per cent comes after a 10-month pause and is the second since Patel took over last September. Patel had last cut the key rate by 0.25 per cent in his first policy review last October, which also was the first decided by a Monetary Policy Committee (MPC).
"Recognising that inflation is expected to rise from the current lows (1.54 per cent in June) over the rest of the year, the MPC persevered with the neutral stance," Patel told reporters at the customary post-policy presser here. "Government and RBI are working in close coordination to resolve large stressed corporate borrowers and recapitalise PSBs within the fiscal deficit target," he added. Eventually, he said, these efforts should help restart credit flows to the productive sectors once demand revives. On divergences in the policy document and action as also in the divergent views of the MPC members, Patel said, "The MPC decision is consistent with the June neutral stance in consonance with the objective of achieving the medium-term target for consumer price index inflation of 4 per cent within a band of +/- 2 per cent, while supporting growth. "Why individual members changed their minds from June, I think the resolution itself on balance, very comfortably shows why we went for a 25 bps cut. Compared to the status quo in June, we had more datapoints, some uncertainty (on Central HRA impact and smooth GST rollout) has been resolved and there has been a substantial reduction in inflation, excluding food and fuel."
RBI Deputy governor Viral B Acharya chipped in saying that addressing the twin balance sheets problem remains the RBI's top priority at the moment as this will help reinvigorate private investments. He said: "Investment slowdown in our assessment is significantly rooted in the resulting debt overhang for this twin balance sheet issues. With the NPA cleanup currently underway, we are striving to meet in near future an important prerequisite for effective transmission of the monetary policy, namely robust health of balance sheets in the financial and real sectors." Stating that one of the biggest uncertainties has been resolved with the smooth GST rollout and central HRA payout, Patel said including this the projection still brings us close to 4 per cent inflation and since this is a statistical exercise it is right time for us to net that out.