The cut should be seen in the backdrop of banks reducing lending rates by 25 to 50 bps since adopting a new loan pricing mechanism.
The Reserve Bank of India (RBI) on Tuesday cut the benchmark repo rate by 25 basis points to 6.5 per cent, as widely expected, with Governor Raghuram Rajan assuring that the monetary stance will remain “accommodative.” Bankers said the comment signals that the central bank is leaving the door open for further reductions.
The rate cut could help lower the cost of loans for consumers, including automobile and home buyers.
The RBI said easing price pressures had been a key factor in determining the policy stance and cited “government’s effective supply side measures keeping a check on food prices, and the government’s commendable commitment to fiscal consolidation.” Retail inflation slowed to 5.18 per cent in February after accelerating for six consecutive months.
The repo rate, which is at its lowest in five years, will help banks reduce borrowing costs, helping boost economic growth. “We have cut interest rates by 150 basis points since the beginning of the accommodative cycle,” Dr. Rajan told reporters.
The latest rate cut should be seen in the backdrop of banks reducing lending rates by 25 to 50 bps since adopting a new loan pricing mechanism — the marginal cost of funds based lending rate — in the first week of April, according to the RBI Governor.
“Policy action is more significant today than just a 25 basis points rate cut. Borrowing is now significantly cheaper and will continue to get so,” he said.
The RBI also announced measures to ease liquidity in the banking system. The daily requirement for maintaining cash reserve ratio has been reduced to 90 per cent from 95 per cent from April 16, the marginal standing facility rate (the penal rate at which banks borrow from the RBI) was cut by 75 basis points and the reverse repo rate (the rate banks earn when they park money with the RBI) raised by 25 bps.
“Policy actions… are not moving into the real economy as quickly as we would like,” Minister of State for Finance Jayant Sinha said on Tuesday. “So our focus is not so much on the sugar high of what the RBI can do in terms of rate cuts as on working in the areas of the economy where transmission is proving a problem.”