Home, auto and other loans are set to become cheaper with RBI today reducing the short-term lending rate by 0.25 per cent to over 5-year low of 6.5 per cent, taking the total cut to 1.5 per cent since January last year.
Unveiling the first bi-monthly monetary policy for the current fiscal, RBI Governor Raghuram Rajan said banks have already cut interest rates by 0.25-0.5 per cent and after today’s rate cut borrowings will become cheaper further.
“Borrowing is cheaper…and will continue to do so,” the Governor said, adding that the introduction of marginal cost of funds-based lending rate (MCLR) system will improve monetary policy transmission.
The Reserve Bank has effected a rate cut after a gap of 6 months. The last policy rate cut, of 0.50 per cent, was done in September 2015. RBI had last pegged the repo rate at 6.50 per cent in January 2011.
RBI has also introduced a host of measures to smoothen liquidity supply so that banks can lend to productive sectors, while indicating an accommodative stance going ahead.
Given weak private investment in the face of low capacity utilisation, a reduction in the policy rate by 0.25 per cent will help strengthen growth, he said.
The cut was broadly in line with expectations. However, the stock market reacted negatively and the BSE index, Sensex, was down over 400 points.
Rajan also took a host of measures on the liquidity front, starting with the narrowing of the policy rate corridor to 0.50 per cent from the earlier 1 percentage point, which resulted in the reverse repo rate – at which banks can park excess funds with the RBI – being reset at 6 per cent.
The policy said the average overnight borrowings by banks have increased to Rs 1,935 billion in March from Rs 1,345 billion in January.
With regard to new bank licences, Rajan said RBI will explore the possibilities of licensing other differentiated banks such as custodian banks and banks concentrating on wholesale and long-term financing. Welcoming RBI action, Minister of State for Finance Jayant Sinha said the rate cut will be a very good stimulus for the economy.
“In coordination with RBI, we really have to amplify both fiscal initiatives and monetary initiatives that are now in the pipeline… We will provide the boost to the economy that it needs,” he said.
Economic Affairs Secretary Shaktikanta Das hoped that the banks will further cut interest rate following RBI action.
“Some of the banks have already reset their interest rates taking into account the marginal cost of lending and done some amount of reduction of rates consequent to all these measures. Consequent to RBI’s announcement today the banks will perhaps need to do some more transmission of reduction of policy rates of RBI,” Das said.
In its monetary policy review, Rajan retained the growth forecast at 7.6 per cent, on the assumption of a normal monsoon and a boost to consumption through the implementation of the Seventh Pay panel recommendations.
The central bank said it expects the central pay hike implementation to hurt inflation by 1-1.5 per cent over a two year period, but added that the shock will not be as strong as that felt during the implementation of the 6th pay panel suggestions.
Stating that the inflation objectives are closer to being realised and the price-rise will hover around the 5 per cent mark for the remainder of the fiscal, Rajan reaffirmed that the monetary policy will continue to remain accommodative to address the growth concerns.
On the regulatory side, RBI said it is mulling a regime where large borrowers (which account for a bulk of the NPAs) shall be mandated to go to the market for a part of their funding rather than relying on banks completely.
RBI also proposed to redefine bank branches and permissible methods of outreach.