Business Companies 05 Oct 2019 Cut: Repo by 25 bps, ...

Cut: Repo by 25 bps, GDP by 80 bps

DECCAN CHRONICLE. | FALAKNAAZ SYED
Published Oct 5, 2019, 12:38 am IST
Updated Oct 5, 2019, 12:38 am IST
Loan rates to come down; repo rate now at 5.15%, GDP growth pegged at 6.1%
Shaktikanta Das,
 Shaktikanta Das,

Mumbai: Borrowers of fresh home, auto and personal loans can look forward to benefit from Friday’s Monetary Policy Committee (MPC) decision to cut the repo rate by 25 basis points (bps) to 5.15 per cent. However, existing borrowers who are on the marginal cost of funds-based lending rate (MCLR) system would have to wait till the next reset date of their loan and also for their bank to cut the MCLR rate.

The MPC also revised downwards its estimate for GDP growth in the current fiscal to 6.1 per cent from 6.9 per cent and pegged the September quarter inflation expectations “slightly upwards” to 3.6 per cent, but retained projection for the fiscal second half at 3.5-3.7 per cent.

 

The repo rate cut, announced by MPC of the Reserve Bank of India in its fourth bi-monthly monetary policy on Friday, is the fifth such cut in a row, taking cumulative repo rate cuts starting February 2019 to 135 basis point.

Banks, however, have been slow in passing on the benefit of the rate cuts to their borrowers, with most of them reducing rates in the range of 10-35 basis points during February to September 2019 while increasing the loan rates for existing borrowers by 7 basis points.

Repo rate, or the rate at which the RBI lends money to commercial banks, is now at a nine-year low and is likely to fall further, as RBI Governor Shaktikanta Das during the press conference hinted at more rate cuts to support growth.

The reverse repo and marginal standing facility rates are now at 4.90 per cent and 5.40 per cent, respectively.
The decision to cut the rate was unanimous, and even one of the six members of the MPC advocated a 40 bps rate cut. Falling economic growth seriously weighed on the MPC, which decided to maintain the accommodative stance of monetary policy, thus keeping the door open for more rate cuts ahead.

Importantly, the RBI again cut its GDP growth forecast for the current fiscal (FY20), this time, sharply by 80 bps to 6.1 per cent from 6.9 per cent, owing to weakening of both domestic and external demand conditions. The economic growth has slumped to a six-year low of 5 per cent rate in April-June with no substantial uptick seen in the following quarter. In the last four policies (including this) RBI cumulatively cut its growth forecast by 130 bps. RBI has projected retail Consumer Price Index inflation for Q2 FY20 at 3.4 per cent (earlier 3.1 per cent) and 3.5-3.7 per cent in H2 FY20. However, there are risks related to volatile crude oil prices, elevated vegetable prices and volatility in financial markets, the MPC noted.

“Continuing slowdown warrants intensified effo-rts to restore the growth momentum. Recent measures announced by the government are likely to help strengthen private consumption and spur private investment activity. With policy space available on account of inflation expected to remain below target in the remaining period of 2019-20 and Q1 of 2020-21, the MPC decided to reduce the policy rate by 25 basis points and continue with the accommodative stance as long as it is necessary to revive growth, while ensuring that inflation remains within the target,” said the RBI governor Shaktikanta Das during the monetary policy press conference.

In order to aid quicker transmission of reduction in repo rates, the RBI has mandated linking of floating portion of retail loans such as housing, auto and MSME loans with either of the external benchmarks i.e, repo rate, three-month treasury bill yield, or six month treasury bill yield effective from October 1, 2019.

These external benchmark linked products would be re-priced at a much rapid pace of three months. However, with external benchmark coming into picture and in order to protect profit margins going forward, most banks are likely to cut deposit rates by ~10-15 bps over the next 2-3 months.

Says Karthik Srinivasan, Vice President and Sector Head, Financial Sector Ratings at Icra, “As compared to the past, the transmission of the RBI rate cuts to the end borrowers will be faster now with retail loans being linked to external benchmark. However, prospective borrowers need to read the fine print such as the reset clause whether it is three months or six months. Existing borrowers will have to wait to get the benefit of lower rates as the MCLR reset is normally once a year and also their respective bank should cut the MCLR rate. That said, the banks will have to balance the interest rates on loans and deposits to manage their margins.”

Padmaja Chunduru, MD & CEO of Indian Bank, said, “We believe, the transmission of monetary policy rate changes will be faster now that banks have already introduced repo-linked retail and MSE products and the rate cuts will be passed on to these borrowers.  With the busy and festive season having started, this rate cut will boost market sentiments.”

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