Mumbai: Home and corporate loans will costless as the Reserve Bank lowered the key interest rate by 0.50 per cent - 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 per cent to 6.75 per cent, lowest in four-and-half-years.
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 per cent, below the 6 per cent 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. RBI lowered its economic growth forecast for the current fiscal to 7.4 per cent from its previous projection of 7.6 per cent.
"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.
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. The fourth policy rate cut by Rajan since January takes up the cumulative rate cuts to 1.25 per cent. 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 per cent", and this will ensure that the real interest rates will continue to be in the 1.5-2 per cent band. 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.
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 per cent 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.
