Repo rate cut will make loans cheaper
The Reserve Bank’s cut in the benchmark interest rate by 25 basis points to 6 per cent announced on Wednesday is on expected lines. It is still a bit conservative but economists had come to expect this from the current dispensation in RBI. The bank cited moderation in inflation and weakening in industrial activity as the provocations for the change. The decision is expected to lower EMIs for home, auto and personal loans which would afford some relief to home buyers though in principle ongoing loan payments would be unaffected. This is the first rate cut since October 2016 and the interest rate is now at a six-year low. “Prices of food and beverages, which went into deflation in May 2017 for the first time in the new Consumer Price Indiex (CPI) series, sank further in June as prices of pulses, vegetables, spices and eggs recorded year-on-year declines and inflation moderated across most other sub-groups.
Economic growth, as measured by GDP, has fallen for a host of reasons. Demonetisation choked consumer demand in the economy while the bad loans problem in the banking system has reduced their capacity to lend to industries for investment purposes. The hope was that lowering borrowing costs would give an incentive to companies to start borrowing money again. Low inflation gave the RBI wiggle room to act on rates. The RBI under law is mandated to keep inflation at 4 per cent. Consumer Price Inflation in June was 1.54 per cent.
The Monetary Policy Committee felt that there was an urgent need to reinvigorate private investment, remove infrastructure bottlenecks and provide a major thrust to the Pradhan Mantri Awas Yojana for housing needs of all. While some of the inflation drivers could well be temporary, the RBI felt that it could not afford to completely overlook the softness in core inflation. Over 40 per cent of its components have shown a sustained decline, corroborating the fact that the real economy is running well below its potential. There is an expectation of a further 25 bp rate cut later in the year if CPI inflation continues to undershoot the 4 per cent target. The challenges for the RBI are unceasing indeed.