Home and auto loans to be cheaper as RBI cuts rates

RBI interest rate,repo rate,GDP

RBI interest rate,repo rate,GDP

Most economists had expected rates to be left unchanged and then possibly cut at the next meeting in April. In its Febriary 5 report, news agency Reuters had said a softer stance would bode well for Prime Minister Narendra Modi's government, which wants to boost lending and lift growth as it faces elections by May.

While four members of the MPC including Das voted for a rate cut, RBI deputy governor Viral Acharya and independent member Chetan Ghate, a professor at the Indian Statistical Institute were in favour of maintaining a status quo on rates.

Further, as per MPC, investment activity is recovering but supported mainly by public spending on infrastructure and that output gap has opened up slightly.

The ruling Bharatiya Janata Party (BJP) is already in an election mode.

The rate cut comes after the government introduced a budget last week that also provided stimulus for the economy, including handouts for farmers and modest tax cuts for the lower middle class.

A former economic affairs secretary, who now has the charge of central bank and is perceived to be close to the Union government, will not take "no" from banks on rate cuts too quickly. The Federal Reserve has changed direction, and now many analysts expect no USA rate hikes this year, after four in 2018.

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In line with expectations, the monetary policy committee (MPC) members also unanimously voted to change the policy stance to neutral whereas rate cut was voted 4-2.

The RBI raised rates twice past year over concerns about rising prices but with inflation now at an 18-month low the bank said it was time to opt for a reduction.

When asked about transmission and banks' reluctance to pass on the rate decreases to borrowers, Das said it is up to the individual banks to take a call on their lending, underlining that the RBI only gives a directional move.

The MPC meeting - the first for RBI Governor Shaktikanta Das - also chose to lower India's inflation projection for April-September to 3.2-3.4% from the 3.8-4.2% seen in December.

Banks have also been given greater operational freedom to offer interest rates to bulk deposits, raising the definition of "bulk deposits" to Rs 2 crore from Rs 1 crore now.

India's December headline inflation fell to an 18-month low of 2.19%, well below the RBI's medium-term 4% target. This too at a time when GDP growth forecast has been revised downward, both for FY19 to 7.2 percent from 7.4 percent earlier at that for FY20 to 7.4 percent. "The macro backdrop as such supports the RBI's stance", said Mendiratta.

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