Mumbai– To shore up slackening growth, the Reserve Bank of India on Wednesday broke with convention by reducing its key lending rates by 35 basis points which is expected to make home and auto loans cheaper and rev up the economy by unleashing consumption-led demand.
The RBI’s monetary policy committee (MPC) in its third policy review of the current fiscal reduced the repo, or short-term lending rate for commercial banks, by 35 basis points to 5.40 per cent from 5.75 per cent.
The reverse repo rate was revised to 5.15 per cent, and the marginal standing facility (MSF) rate and the bank rate to 5.65 per cent.
Besides reducing key lending rates for the fourth consecutive time, the MPC maintained its accommodative stance of the monetary policy.
A lower repo lending rate for commercial banks, will reduce interest cost on automobile and home loans, thereby ushering in growth.
Currently, high GST tax rate, along with stagnant wages, farm distress and liquidity constraints have demoralised auto, home and capital goods buyers.
Even the high frequency indicators suggested moderation in economic activity.
As per the monetary policy statement, the MPC was of the view that the standard 25 basis points reduction might prove to be inadequate in view of the evolving global and domestic macroeconomic developments.
Acknowledging the departure from the standard policy of reducing or increasing key rates in the multiples of 25, RBI Governor Shaktikanta Das said the practice was not “sacrosanct” and that the MPC found 35 basis points as sufficient for the time period, as 25 basis points would have been “inadequate” and 50 would have been “excessive”.
Historically, the central bank has been either reducing or increasing rates in the multiples of 25 basis points.
On the growth front, the MPC reduced its forecast to 6.9 per cent from 7 per cent in FY2019-20.
The GDP growth for the first quarter of FY2020-21 is projected at 7.4 per cent.
In the June resolution, MPC had projected the real GDP growth for 2019-20 at 7 per cent — in the range of 6.4-6.7 per cent for H1:2019-20, and 7.2-7.5 per cent for H2 — with risks evenly balanced.
However, MPC said the impact of monetary policy easing since February 2019 is also expected to support economic activity, going forward.
Nonetheless, equity investors were disappointed, as there were no announcements on new measures to boost consumption.
The S&P BSE Sensex closed 286.35 points or 0.77 per cent lower at 36,690.50 points, while the NSE Nifty50 was down 92.75 points or 0.85 per cent at 10,855.50 points.
“Markets reacted negatively immediately to the 35 bps cut in repo rate cut largely on the basis of “sell on news” reaction even as the cut was more than the majority expectations,” said Deepak Jasani, Head of Retail Research, HDFC Securities.
Industry-body Ficci’s President Sandip Somany said: “With today’s cut, RBI has lowered the policy rate by 110 basis points in the current calendar year.”
“The central bank has also kept liquidity in the surplus mode, and it is now critical for banks to move fast and transmit this ease in policy rate in the form of lower lending rates.”
PHD Chamber of Commerce and Industry President Rajeev Talwar said the cut would help to rejuvenate consumption and increase competitiveness of the producers with reduced cost of capital.
According to ICRA’s Principal Economist Aditi Nayar: “The unconventional 35 bps rate cut is a clear signal that the increasing evidence of a pervasive slowdown in economic growth has emerged as the MPC’s chief concern, given that it expects inflation to remain under its medium-term target.”
SBI Chairman Rajnish Kumar said: “On the development and regulatory front, the decision to make available the NEFT platform on 24/7 basis, coupled with on-tap authorisation, will add depth to retail payments.”
“Reduction in risk weightage for consumer credit will free up capital from the banking sector for productive use. Similarly, permitting Banks to on-lend through NBFCs will facilitate credit flow to priority sectors.”
In a related development, SBI has decided to cut repo linked lending rate by 35 bps and MCLR by 15 bps effective August 10. (IANS)