This may not be the last rate cut by RBI this year; interest rates may fall below 5%, here’s why

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Updated: Oct 04, 2019 10:19 PM

RBI Monetary Policy: Economists believe that despite repo rate being at the lowest level in a decade, it has not bottomed out yet and may go below 5%.

RBI, repo rate, bank interest rate, banking newsRBI has cut benchmark interest rate by 135 basis points this year.

Bank Interest Rates: The Reserve Bank’s decision to cut short term inter-bank lending rate by another 25 basis point may not be the last rate cut this year. Economists believe that due to the low inflation rate, the RBI has enough room to further cut the benchmark lending rate known as the repo rate. With Friday’s monetary policy announcement, the Reserve Bank has cut the repo rate by 135 basis points since February this year. The 25 basis point cut effected by the RBI today is the fifth straight cut this year that brought down the repo rate to 5.15%, the lowest in the decade. Reserve Bank will do everything in its power to revive the growth and given the benign inflation rate there is a scope of more cut in the repo rate, said a top economist.

“This is part of the trend and effort on the part of RBI to do whatever it can to support and revive the growth. We all know that fiscal space is very limited yet the government announced a tax rate cut and there is a hope that there will be an income tax rate cut as well,” said Sunil Sinha, Principal Economist of India Ratings

“All of this is being done essentially to ensure that growth is revived,” he told Financial Express Online.

The Reserve Bank is not only relying on slashing the benchmark interest rate. It is also taking concrete steps to ensure that the banks pass on these benefits to the end customers. Concerned with the slow transmission of interest rate cuts, the central bank had asked scheduled commercial banks to link their interest rate to the repo rate fixed by the bank. This shift from prime lending rate (BPLR) to repo rate linked rate (RLLR) will immediately benefit new borrowers. The move is aimed at boosting the consumption that is considered essential for economic turnaround.

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In its policy announcement, the Reserve Bank also made it clear that more rate cuts were in offing. The RBI’s job has become a lot easier as crude oil and commodity prices are at a low level.

“Fortunately the inflation rate is well within the target range. And it is likely to remain within the target range for the rest of the fiscal and maybe for the first quarter of the next fiscal as well,” said Sunil Sinha.

Though economists are hopeful that the RBI will further cut down the repo rate in the current fiscal, however, it is not clear whether it will be done in December or February.

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“Whether this will happen in December or February it is difficult to say because that is largely data dependent but if the inflation remains within the RBI’s projection then, in my view, there is a room for another 50 basis points cut,” Sunil Sinha said.

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