Mumbai: Home, auto and corporate loans will become cheaper after Reserve Bank on Tuesday reduced the key interest rate by 0.25 percent and decided to inject Rs 18,000 crore liquidity into the system to perk up sagging growth.
Shedding its nine-month long hawkish monetary policy stance, the RBI cut short-term lending rate called repo by 0.25 percent to 7.75 percent and Cash Reserve Ratio (CRR) by similar margin to 4 percent. The other key rates have been adjusted accordingly.
These initiatives are aimed at encouraging investments, supporting growth and anchoring inflationary expectations, RBI Governor D Subbarao said while unveiling the third quarter monetary policy review.
Bankers indicated that they would cut lending and deposit rates over next couple of days to the benefit of borrowers, though depositors may get lesser returns. The industry too appeared satisfied with the rate cut hoping that it would boost demand and promote growth.
On future policy actions, RBI said, it would depend upon fiscal situation and growth-inflation dynamics, which to a large extent will be conditioned by the budget to be presented by Finance Minister P Chidambaram on February 28.
"If inflation moderates further, CAD (Current Account Deficit) moderates further, there will be more room for monetary policy easing. But if they go along the currently expected lines, the space for monetary policy easing is quite limited", Subbarao said.
RBI has lowered the growth projection for the current fiscal to 5.5 percent from 5.8 percent estimated earlier. The economy grew by 6.5 percent in 2011-12.
"We will pass on (the benefit of rate cut) to our borrowers without compromising on the Net Interest Margin", said SBI Chairman Pratip Chaudhuri.
The RBI also cut the March end inflation projection to 6.8 percent, from 7.5 percent earlier.
While stock markets initially cheered RBI's rate cut with the BSE Sensex moving up by 91 points, however, the Sensex declined to 19,991, down by 115 points over Monday's close.
Asked about a possible cut in deposit and borrowing rate, ICICI Bank CEO and Managing Director Chanda Kochhar said "there is going to be a transmission on the lending side, while on the deposits front, we will wait and watch. There is going to be a lag ... The cuts are positive for EMIs".
Commenting on the policy action, Commerce and Industry Minister Anand Sharma said: "It is a positive step which will infuse liquidity and help in catalysing growth."
Planning Commission Deputy Chairman Montek Singh Ahluwalia said the CRR cut will have impact on long term interest rates.
"I think this is the right thing to do at this point of time given that (the decline) in economy is beginning to bottom out," he said.
The repo rate, which was cut last in April 2012, stands revised at 7.75 percent, while the liquidity infusing CRR stands at 4 percent effective February 9. CRR was last reduced by 0.25 percent in November 2012.
Supporting the government's recent reform push, RBI said measures like opening up the FDI in some sectors and moves towards fuel price deregulation should put the economy back on the high growth trajectory and spur investment inflows.
"It is critical now to arrest the loss of growth momentum without endangering external stability," RBI said, adding that a rising current account deficit (CAD) could threaten macroeconomic stability and impact growth.
"Large fiscal deficits will accentuate the CAD risk, further crowd out private investment and stunt growth impulses," RBI said.
On Monday, the RBI had left everyone guessing with a hawkish policy stance in the third quarter macroeconomic and monetary development report stating that sticky inflation and widening fiscal and current account deficits limited its scope for a rate cut.