RBI cuts key lending rate by 25 pc; loans likely to get cheaper

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Mumbai, Feb 7 (AGENCIES): The Reserve Bank of India Thursday cut benchmark lending rate by 0.25 per cent to 6.25 per cent on expectation of inflation staying within its target range, a move that may make home and other loans cheaper.

The RBI, under its new Governor Shaktikanta Das, changed the monetary policy stance to ‘neutral’ from the earlier ‘calibrated tightening’, signalling further softening of rates if inflation remain benign. With Deputy Governor Viral Acharya and another member Chetan Ghate voting for a status quo, Das and three others outvoted them for reduction in repo rate to 6.25 per cent from the existing 6.50 per cent.

Accordingly, reverse repo was reduced to 6 per cent from 6.25 per cent. Repo rate is the rate at which commercial banks borrow money from the RBI; while reverse repo rate is the rate at which RBI collects money from banks. The RBI cut its estimates on headline inflation – which cooled off to an 18-month low of 2.2 per cent in December – for the next year, and expects the number to come at 2.8 per cent in March quarter, 3.2-3.4 per cent in first half of next fiscal and 3.9 per cent in third quarter of FY20.

“Headline inflation is projected to remain soft in the near term reflecting the current low level of inflation and the benign food inflation outlook,” the MPC resolution said, adding that it needs to be watchful of vegetable prices, oil prices, trade tensions, health and education inflation, financial market volatility and monsoon outcomes.

The rate cut is in consonance with achieving the medium-term objective of maintaining inflation at the 4 per cent level while supporting growth, it said. “The need is to strengthen private investment activity and buttress private consumption,” the resolution said, noting that investment activity is recovering, supported mainly by public spending on infrastructure.

It can be noted that a cut in rates can make loans cheaper and can boost investment activities in the economy. The RBI expects GDP growth to be at 7.4 per cent in FY20, which is up from the 7.2 per cent estimated for FY19 by the CSO. The interim budget proposals for FY20 will boost aggregate demand by raising disposable incomes, but the full effect of the measures will take time to play out, the MPC said. The resolution said recent unusual pick-up in the prices of health and education services could be a one-off phenomenon, adding that the crude oil price outlook remains broadly the same as in the December policy.

The RBI had hiked rates twice in quick succession, in June and August, last year fearing an increase in inflation and also changed the stance of policy to ‘calibrated tightening’ from ‘neutral’ earlier. Das was appointed as RBI Governor in December after the surprise resignation of Urjit Patel amid a feud with the government over policy measures. Before the presentation of the interim budget, a majority of analysts were expecting higher chances of a rate cut or at least a shift in stance to ‘neutral’. A cool-down in headline inflation for December to an 18-month low of 2.19 per cent was one of the major reasons for their expectations.

With provisions like a Rs 70,000-crore basic income scheme for farmers, the central government budget deviated marginally from the fiscal consolidation path by announcing a slip in FY19 and pegging the gap at a higher 3.4 per cent for FY20. This was called inflationary by many analysts, leading to greater expectations of pause by the RBI under the new governor. The government is also expecting the RBI to deliver an interim dividend for the second year running at Rs 28,000 crore, which is likely to be taken up for discussion at RBI’s next board meet. On the regulatory policies front, the RBI proposed relaxations on foreign borrowings by  companies undergoing insolvency resolutions to pay off the local lenders, redefined bulk deposits as those above Rs 2 crore from the earlier Rs 1 crore, align risk weights of bank loans to NBFCs with their ratings rather than a blanket 100 per cent earlier and also harmonise categories of NBFCs.

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