RBI’s New Year Gift To Borrowers, Cuts Lending Rate By 25 bps

Mumbai: The Reserve Bank of India’s (RBI) rate setting panel on Friday delivered an early new year’s gift to millions of borrowers by cutting its policy repo rate by 25 basis points to 5.25 per cent paving the way for banks to lower interest rates on home loans, car loans, personal, small business loans. Repo rate is the rate at which the central bank lends short term money to commercial banks. A lower repo rate means banks can borrow funds at a lower cost from the  central bank and are expected to pass on the lower cost to the borrowers.

The rate-setting panel, the Monetary Policy Committee (MPC), retained its neutral policy stance. With this cut, the MPC has delivered four lending rate cuts, cumulatively easing the repo rate by 125 basis points so far this year since February amid a sharp decline in Consumer Price based inflation (CPI). For a home loan of Rs 50 lakh, borrowers could now save around Rs 1.80 lakh over the 20 year tenure, further improving affordability and boosting housing demand.

In addition to the rate cut, the RBI announced measures to ensure sufficient liquidity in the banking system and  stabilize the rupee. These include open market purchase of government bonds worth Rs 1lakh crore and $ 5 billion of dollar-rupee buy/sell swap for three year tenure in December designed to inject durable liquidity into the system and facilitate faster transmission of rate cuts. 

Speaking at the policy press conference, RBI Governor Sanjay Malhotra described the current macro-economic environment as a “rare Goldilocks moment for India”, with inflation at a benign 2.2 per cent and growth at 8 per cent in the first half of the financial year.  The central bank revised both inflation and growth projections. It delivered a benign inflation outlook, driven primarily by exceptionally subdued food prices and lowered the CPI estimates to 2 per cent from 2.6 per cent for the current fiscal giving space to cut policy rates. On the growth front, it noted that the domestic  activity remains resilient on account of a healthy agricultural sector, benign inflation and strong corporate and financial balance sheets.

Reflecting on this resilience the real GDP growth has been revised upwards across quarters with the current fiscal year estimate at 7.3 per cent from 6.8 per cent. It however expects GDP growth to moderate in the second half, some signs of which are already visible in recent high frequency indicators. 

The MPC noted that the merchandise exports face external headwinds, global uncertainty remains elevated and risks to the outlook are evenly balanced.