RBI cuts rate by 0.50% to boost economy; home, auto loans to cost less

Mumbai: Home and corporate loans will cost less as the Reserve Bank on Tuesday lowered the key interest rate by 0.50 percent - the biggest cut in over three years - to bolster the economy.

In its fourth bi-monthly monetary policy for the current fiscal, RBI cut benchmark repurchase (repo) rate from 7.25 percent to 6.75 percent, lowest in four-and-half-years.

Read Full Text: RBI 4th bi-monthly Monetary Policy Statement for 2015-16

RBI Governor Raghuram Rajan, who had faced growing pressure from the government as also industry to reduce one of Asia's highest borrowing costs, justified the bigger than expected reduction saying consumer inflation was likely to be at 5.8 percent, below the 6 percent target for January.

The focus should now shift to bringing inflation to around 5 per cent by March 2017, he said, adding that RBI will be vigilant for signs of monetary policy adjustments that are needed to stick to the "deflationary path".

He also drew comfort from US Federal Reserve delaying the first hike in interest rates in nine years, which may have put emerging market currencies under pressure.

Download: RBI 4th bi-monthly Monetary Policy Statement for 2015-16

RBI lowered its economic growth forecast for the current fiscal to 7.4 percent from its previous projection of 7.6 percent.

"While the Reserve Bank's stance will continue to be accommodative, the focus of monetary action for the near term will shift to working with the government to ensure that impediments to banks passing on the bulk of the cumulative 125 basis points cut in the policy rate are removed," Rajan said.

Jaitley nudges banks to pass on rate cut benefit to borrowers

The reduction comes on the back of interest rates being cut thrice earlier this year by 25 basis points each.

Within minutes of RBI policy announcement, Andhra Bank cut its benchmark lending rates by 0.25 per cent. The other banks are likely to follow suit.

The BSE Sensex, which was over 300 points down, staged a recovery after the announcement of the policy. However, it again slipped into the negative zone.

Rajan for faster transmission of RBI rate cut

The fourth policy rate cut by Rajan since January takes up the cumulative rate cuts to 1.25 percent.

Affirming RBI?s commitment to be accommodative in its stance, Rajan said, "continuing policy implementation, structural reforms and corporate actions leading to higher productivity will be the primary impetus for sustainable growth".

He made it clear that RBI has "front-loaded policy action by a reduction in the policy rate by 0.50 percent", and this will ensure that the real interest rates will continue to be in the 1.5-2 percent band.

Rate cut of 0.5% for stronger, sustainable growth: Rajan

Rajan reiterated the need for banks to pass the benefits of the RBI actions to their lending rates and added that with this cut, the focus of the monetary policy will now shift to working with the government to remove impediments to pass a bulk of the cumulative 1.25 per cent cuts to borrowers.

It observed that banks have passed only an average of 0.30 percent to the borrowers as against RBI?s 0.75 percent cut to borrowers and blame the delays in repricing of deposits for the lag.

He added that deposit rates have "reduced significantly" and further transmission "is possible".

The central bank is targeting to get headline inflation at 6 percent by January 2016 and Rajan said it will reach 5.8 percent by then. In the way forward, the focus will now shift to getting the number down to 5 per cent by 2016-17. Largely due to the base effects, the number had come at 3.66 percent in August.

Rajan also introduced a slew of actions on the financial markets front, starting with setting the foreign portfolio investment limits in rupee terms, rather than in dollars.

He also said that FPI investments in government bonds will be increased in phases to 5 percent of the outstanding stock by March 2018, which can bring in an additional of Rs 1,200 billion (Rs 1.2 lakh crore), over and above the existing limit of Rs 1,535 billion.

A majority of analysts were expecting Rajan to cut rates at the policy review largely because of inflation being under control, and possibilities of it staying low in immediate future on compressed commodity prices.

However, more than the rate action, it was the guidance in the future stance, which the market was watching.

The Finance Ministry had also been building pressure on RBI to cut rates, which will serve as a booster for the economy, where the GDP expansion has slipped to 7 percent for the June quarter.

Citing the wholesale price-based inflation continuing to be in the negative zone, Chief Economic Advisor Arvind Subramaniam had said we run the risk of deflation as well.

However, in its Monetary Policy Report, RBI said that concerns around deflation are "overstated" and an "array of facts" like the sequential pick-up in growth can be presented to counter the argument.

"The prescription is that monetary policy should act aggressively to pre-empt deflation," it said, adding that for pushing up the growth, the government will also have to work hard.

At 3.66 per cent for August, the consumer price inflation is within the RBI's comfort zone, especially given its stated target of getting the rate of price rise to 6 per cent by January 2016.

However, a week ahead of the review Rajan had given mixed signals of the stance he will be taking at the review, saying the inflation is low due to base effects -- it was very high same time last year -- and also flagged worries on inflation expectations in the economy, which continue to be very high.

The comments had come a day after US Federal Reserve decided to delay its rate hike, further fuelling expectations of a rate cut by India.

Apart from the US Fed's actions, the 13 percent shortfall in monsoon till now, which can impact inflation going forward, is another key factor.

However, government's resolve in not hiking minimum support prices by a higher degree will act as a comforting factor.