RBI cuts interest rate 25 basis points, cheers market and borrowers alike

The announcement cheered the markets and consumers. There were more cheers for consumers as banks declared that they would immediately pass on the rate cut to retail middle-class borrowers.

Reserve Bank of India Governor Urjit Patel on Tuesday cut interest rates by a quarter point to 6.25% and maintained that it would continue with its accommodative monetary stance. All six members of the monetary policy committee (MPC) unanimously voted in favour of the rate cut. This was the first time when the newly-constituted MPC decided on the interest rate.

The announcement cheered the markets and consumers. There were more cheers for consumers as banks declared that they would immediately pass on the rate cut to retail middle-class borrowers.

“The Committee expects that the strong improvement in sowing, along with supply management measures, will improve the food inflation outlook,” RBI said. “The sharp drop in inflation reflects a downward shift in the momentum of food inflation – which holds the key to future inflation outcomes – rather than merely the statistical effects of a favourable base effect.”

“The accommodative stance of monetary policy and comfortable liquidity conditions should support a revival of credit to the productive sectors,” RBI said.

The Bank also said that the growth momentum in the economy would continue. “The momentum of growth is expected to quicken with a normal monsoon raising agricultural growth and rural demand, as well as by the stimulus to the urban consumption spending from the pay commission’s award,” it said.

It said the seasonal surge in sensitive food times like pulses, fruits and vegetables might have peaked in July, considerably easing inflationary pressures within the economy.

“Subdued momentum in food inflation in Q3 and the usual seasonal softening of food prices in early Q4, notwithstanding a reversal of base effects in March 2017, improves the near-term outlook for inflation considerably,” the RBI said in its report.

The BANK noted that the GST implementation might have one-off effects, which tend to dissipate after a year of its implementation.

“By current reckoning, the pass-through of the goods and services tax (GST) will likely commence from April 2017 and last for about 12-18 months, going by the cross-country experience,” the report said. “While the impact of the GST on CPI inflation would largely depend on the standard rate decided by the GST Council, almost 50 percent of the CPI is expected to be exempt.”

Finally, the bank expects inflation to ease to 4.7 percent by Q4 of 2016-17 and to 4.4 percent in Q2 of 2017-18, both lying within the Reserve Bank’s inflation target band.

However, the good news for consumers ahead of Dusshera, Diwali and Xmas was that bankers promised to swiftly pass on the 0.25 percent rate cut effected by the Reserve Bank to borrowers, a move that would lower home, auto, and corporate loans.

“For the busy season of the financial year, a cut in repo rate by 25 basis point is indeed a welcome sign. With MCLR (marginal cost of funds-based lending rate) already stabilised, the pass through of this cut is expected to be quite swift,” said Dena Bank CMD Ashwani Kumar who is also chairman of Indian Banks’ Association.

SBI Chairperson Arundhati Bhattacharya said: “With benign inflation trajectory going forward, RBI’s policy stance is expected to remain accommodative. Banks will continue to transmit rates based on evolving liquidity scenario.”
ICICI Bank Managing Director and CEO Chanda Kochhar said rate cut would boost investment as well as consumption.

“I welcome the RBI’s move to cut the repo rate by 25 basis points as well its intent to support liquidity. These steps will give a strong impetus to both consumption and investment-led growth for the country… The strong focus by the government on supply side measures, which have resulted in containing inflation, has provided room to RBI to support growth through this rate cut,” Kochhar said.