The Reserve Bank of India cut its key lending rate to a six-and-half-year low on Wednesday, giving banks the elbow room to reduce EMIs on home and car loans and lend more money to businesses.
The cut in the repo rate — the rate at which the RBI lends to banks — by a quarter-percentage point was expected after retail inflation, led by softer food prices, fell to a more than five-year low in June. The repo rate now stands at 6%.
The move will likely ease some of the pressure from the government and markets for action to lift the economy, which had annual growth in January-March of 6.1 percent – fast by global standards but India’s lowest number in more than two years.
“There is scope for banks to cut rates further, especially for those sectors which have not benefitted in the past cuts,” said RBI governor Urjit Patel.
Four of the RBI’s six-member Monetary Policy Committee (MPC) voted for a 25 basis points reduction. Ravindra Dholakia, professor at IIM Ahmedabad, wanted a 50 basis points cut, while Michael Patra, an executive director at RBI, wanted to hold rates.
The rate cut is the first since October that underlined the RBI’s confidence in the economy, which has seen a surge in foreign investments into debt and shares this year. Little adverse impact from demonetisation or poor rains also helped shape the decision.
“These factors… opened up some space for monetary policy accommodation,” RBI governor Urijit Patel said.
But the central bank indicated it wasn’t fully convinced that inflation wouldn’t accelerate. The bank’s inflation target is 4%. It was also yet to determine the impact of the July 1 rollout of a national goods and services tax.
“The MPC remains focused on its commitment to keeping headline inflation close to 4% on a durable basis,” the RBI said in a statement.
“The MPC will continue monitoring movements in inflation to ascertain if recent soft readings are transient or if a more durable disinflation is underway.”
The benchmark stocks indices ended marginally lower than their previous day closing, possibly disappointed by a smaller rate cut. The RBI also cut the reverse repo rate – the rate at which the central bank borrows from banks – by 25 basis points to 5.75%.
On Tuesday, the State Bank of India – the country’s largest lender and market leader – reduced interest rate on savings bank deposits by half percentage point, possibly on hopes that the RBI would cut lending rates.