Loan interest costs set to fall as RBI cuts rate to 6.25%

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In a surprise move that could bring down home and auto loans, the RBI on Thursday went the whole hog by not only lowering its key lending rate for commercial banks by 25 basis points (bps) to 6.25 per cent, but also turned accommodative changing its monetary policy stance from “calibrated tightening” to “neutral”.

The move, designed to ease the liquidity crunch, comes as a boost for the economy in an election year.

The Reserve Bank of India’s decision, in its final policy review of the fiscal, was guided by its “assessment of the evolving macroeconomic situation” wherein headline inflation was projected to soften further and the economy’s growth impulses had moderated.

The central bank’s reverse repo rate was also adjusted to 6 per cent, and the marginal standing facility (MSF) rate and the Bank Rate to 6.5 per cent.

“Headline inflation is projected to remain soft in the near term reflecting the current low level of inflation and the benign food inflation outlook.

“Beyond the near term, some uncertainties warrant careful monitoring,” RBI Governor Shaktikanta Das, who presided over his first monetary policy committee (MPC) meeting said while making the policy review announcement.

“The MPC noted that the output gap has opened up modestly as actual output has inched lower than potential.

“Investment activity is recovering…but the need is to strengthen private investment activity and buttress private consumption,” he said following the meeting that started on Tuesday.

It is vital for the RBI to “act in a timely manner” to support growth, given that inflation continues to remain benign, and in view of the fact that investment demand has decelerated, Das added.

The RBI also revised downwards its consumer price index (CPI), or retail inflation, projection to 2.8 per cent for the ongoing quarter, to 3.2-3.4 per cent in the first half of the next fiscal and 3.9 per cent in the third quarter of 2019-20, “with risks broadly balanced around the central trajectory”.

The central bank projected GDP growth to be in the range of 7.2-7.4
per cent in the first half of the next fiscal beginning April, and at 7.5 per cent in the third quarter “with risks evenly balanced”.

The RBI’s rate cut buoyed the Indian equity market, with the BSE Sensex touching an intra-day high of 37,172.18, rising nearly 200 points from the previous close of 36,975.23, while the NSE Nifty50 gained 52.85 points rising to 11,115.30.

Intrest-sensetive auto and realty stocks gained around 1 per cent while the key banking stocks gained 0.50 per cent as a policy rate cut would lead to lower interest rates for loan seekers.

Noting the slowdown in industrial activity in November and deceleration in core industries’ growth in December, the RBI also noted foreign portfolio investment inflows turned negative in January.

The central bank’s statement noted that while the decision to change the monetary policy stance was unanimous, two members of the MPC — non-RBI member Chetan Ghate and the RBI Deputy Governor Viral Acharya — voted to keep the policy rate unchanged.

Thursday’s monetary policy was preceded by the government’s Interim Budget presented on February 1 showering largess across large sectors such as agriculture, housing and the informal one, and containing proposals of tax cuts that would benefit the middle class.