RBI makes surprise cut in interest rate, home loans could get cheaper

07 February, 2019, 20:10 | Author: Mary Valdez
  • Home auto loans set to be cheaper as RBI Governor Shaktikanta Das cuts interest rates by 0.25

Gaurav Dua, Head of Research at Sharekhan by BNP Paribas, said the change in stance to "Neutral" and dovish commentary open doors for further rate cuts going ahead.

The rate cut will benefit Modi's government as it will boost economic growth and lending to small businesses, according to Ashwani Mahajan, a leader of the economic wing of the powerful Hindu nationalist group, Rashtriya Swayamsevak Sangh, which is the fountainhead of the BJP.

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.

The six-member Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) made a decision to reduce the key policy rate or the repo rate by 25 bps to 6.25% in the last bimonthly policy review of 2018-19 while changing the policy stance to "neutral" from "calibrated tightening".

"The rate cut is unlikely to give a major fillip to investments as capacity utilisation still remains low in the manufacturing sector", said Devendra Kumar Pant, chief economist, India Ratings & Research, the arm of rating agency Fitch.

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RBI will meet banks in the next fortnight to discuss a range of issues, including the extent to which lenders have passed on lower repo rates to its customers, Das told journalists after presenting the policy. The Federal Reserve has changed direction, and now many analysts expect no U.S. rate hikes this year, after four in 2018. This is the first time the repo rate has been cut since August 2017.

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 rupee weakened to 71.69 to the dollar immediately after the announced but strengthened soon after to 71.42. The NSE index was up 0.05% at 11,067.05 while the 10-year benchmark government bond yield fell to 7.52% from Wednesday's close of 7.56%. The gross domestic product (GDP) growth is likely to be influenced by growth in bank credit and overall financial flows to the commercial sectors, though slowing global demand could play a dampener, said an RBI document released after the three-day meeting of the central bank's Monetary Policy Committee (MPC).

The RBI governor said that they expect GDP growth rate to be at 7.4 per cent in fiscal 2019-20 which is up from 7.2 per cent estimated for financial year 2018-19 by central statistical organization. The repo rate cut will lead to a decrease in EMIs on Home Loans, Car Loans and Personal Loans as the banks would likely decrease the interest rates. "The macro backdrop as such supports the RBI's stance", said Mendiratta.

Statistics showed the economy expanded only 7.1 per cent on-year in July-September, down from 8.2 percent in the previous quarter.

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