Thursday, 19 July, 2018

India's central bank cuts key lending rate to 6 percent

Reuters Reuters
Debra Rodriguez | 03 August, 2017, 01:23

The Reserve Bank of India on Wednesday cut the repo rate by 0.25 basis points to 6% as anticipated, which is the lowest in six-and-a-half years since November 2010.

The industry in general and the Union Ministry of Finance had been critical of RBI for not cutting the repo rate in its last two monetary policies.

Under the earlier base rate regime (for borrowers before April 2016), changes in lending rates happened slowly, making it hard for lenders to transmit RBI's rate cuts. The Committee was formed during a year ago on the lines of Federal Open Market Committee in the US.

Under the MCLR rate-setting method, banks calculate the benchmark lending rate by using the cost incurred on incremental deposits, not average cost of deposits. So it was not surprise that markets looked underwhelmed after RBI's 25 bps rate cut.

Pankaj Bansal, Director, M3M Group: RBI's decision to lower the repo rate is on expected lines. "A number of regulatory and developmental measures like tri-party repo for corporate bonds and enhanced limits for foreign investors using the futures market have also been announced", said Chanda Kochhar, MD and CEO, ICICI Bank.

"These factors along with the normal and well distributed normal rainfalls and the smooth roll out of the GST has opened up the space of monetary policy accommodation", RBI said.

The sharp fall in the prices of food articles led to June CPI slipping to a five-year low of 1.5 per cent, way below RBI's long-term target of 4 per cent and its April-September projection of 2-3.5 per cent.

Now the biggest question is will banks slash home loan interest rate? The panel, in its previous bi-monthly review in June, had retained the repo rate at 6.25 per cent for the fourth straight time citing risk to inflation.

As a result, the RBI said it wanted more confidence that inflation would move "close to 4 percent on a durable basis".

Interestingly, the MPC was again divided when it comes to the rate action.

The stock market, which had largely factored in the cut, declined. This cut in the interest rate will be ranging between quarter percentage point to a more than 6-1/2 year low after inflation slumped. The Indian rupee strengthened past 64-mark to hit over two-year high against the U.S. dollar. More than the token rate cut, what one shouldn't miss is the message in the policy document to the government on private investments and infrastructure problems.

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