RBI policy rate cut: RBI paves way for cut in home and car loan rates

The Reserve Bank of India on Wednesday paved the way for banks to lower interest rates on home, car and corporate loans with a 0.25 per cent cut in its key policy rate to more than a 6-year low. The RBI said the decline in inflation has given it headroom for easing the monetary policy to rev up the country's slowing economy.

The reduction in the repo rate, at which the RBI gives short-term loans to banks, by 0.25 per cent to 6.00 per cent comes after a 10-month period during which the central bank had stuck to a hawkish monetary policy to control inflation. A softer stance was widely expected as consumer inflation plummeted to a five-year low of 1.54 per cent in June.

The repo rate is now at its lowest level since November 2010. The RBI said easing prices had provided "some space" for monetary policy accommodation as inflation is now well below the RBI's 4 per cent target and its projection of 2.0-3.5 per cent for April-September. RBI Governor Urjit Patel said that there is scope for banks to cut interest rates further, especially for those sectors which have not benefited in the policy rate cuts in the past.

The experience with the marginal cost of funds based lending rates (MCLR) system introduced in April 2016 for improving monetary transmission by banks has not been entirely satisfactory, RBI Deputy Governor Viral Acharya told reporters. RBI is studying whether that can move to a market-linked benchmark, he added. Patel said the trajectory of inflation in the baseline projection is expected to rise from current lows, so the monetary policy committee (MPC) decided to keep the policy stance neutral and to watch incoming data.

Patel noted that the MPC will continue monitoring movements in inflation to ascertain if recent soft readings are transient or if a more durable disinflation is underway. The MPC remains focused on its commitment to keep headline inflation close to 4 per cent on a durable basis, he added. The MPC has stressed on an urgent need to reinvigorate private investments, clear infrastructure bottlenecks and provide a major thrust to the Pradhan Mantri Awas Yojana for affordable housing.

In its assessment of real activity, the MPC noted that while the outlook for agriculture appears robust, underlying growth impulses in industry and services are weakening, given corporate deleveraging and the retrenchment of investment demand, the RBI Governor said. RBI also said it is working in close coordination with the government to resolve large stressed corporate borrowings and recapitalise public sector banks.

The banking sector in India is reeling under Rs 8 lakh crore of non performing assets (NPAs) or bad loans, of which PSU banks alone account for over Rs 6 lakh crore. Appreciating RBI's decision to cut interest rate, Economic Affairs Secretary Subhash Chandra Garg said it is an important step to sustain growth and moderate inflation. We welcome the 25 basis points cut in the repo rate as an important step necessary to converge toward the appropriate real monetary conditions for sustained growth consistent with India's potential and for stable, moderate inflation, he said.