Rate cut hat-trick: RBI turns accommodative to boost growth

Mumbai, June 6 (IANS) Home and auto loans are set to become cheaper as the Reserve Bank of India (RBI) went for a hat-trick of rate cut on Thursday by lowering key lending rate for commercial banks by 25 basis points (bps) to 5.75 per cent, the lowest in the past nine years.

This is the third reduction in repo rate in 2019. The RBI in April lowered its key lending rate by 25 bps to 6 per cent. Before that, in February, the MPC had voted to lower the repo rate by 25 bps to 6.25 per cent.

Besides, the RBI changed the monetary policy stance from neutral to accommodative. The significance of the move can be gauged from the fact that the RBI has reduced its growth forecast from 7.2 per cent to 7 per cent in 2019-20.

RBI Governor Shaktikanta Das said the central bank would ensure that the transmission of the reduced repo rate was faster and higher.

In the absence of complete transmission of lower lending rates, consumers pay higher EMIs and the corporates' repayment burden also remains high.

The decision to reduce the repo rate was taken by the RBI's Monetary Policy Committee (MPC) at its second monetary policy review of the ongoing fiscal.

As per the monetary policy statement, the main considerations behind the MPC's decision were decline in private final consumption expenditure (PFCE) and moderation in exports.

At present, high interest rates and liquidity constraints have demoralised auto, home and capital goods buyers. Even the high frequency indicators suggest moderation in activity in the service sector.

Accordingly, a lower repo, or short-term lending rate for commercial banks, will reduce interest cost on automobile and home loans, thereby ushering in growth.

"A sharp slowdown in investment activity along with continuing moderation in private consumption growth is a matter of concern. The headline inflation trajectory remains below the target mandated to the MPC even after taking into account the expected transmission of the past two policy rate cuts," the policy statement said.

"Hence, there is scope for the MPC to accommodate growth concerns by supporting efforts to boost aggregate demand, and in particular, reinvigorate private investment activity, while remaining consistent with its flexible inflation targeting mandate," it said.

However, equity investors were disappointed with the lower-than-expected rate cut and no announcements on new measures to boost liquidity for the NBFC sector.

Consequently, the BSE Sensex closed 553.82 points or 1.38 per cent lower at 39,529.72 points, while the NSE Nifty50 was down 177.90 points or 1.48 per cent at 11,843.75 points.

"Markets sold off on Thursday post disappointment after the RBI MPC Credit Policy did not announce any immediate measure to tackle the liquidity issues faced by stressed NBFCs," said Deepak Jasani, Head of Retail Research, HDFC Securities.

"Investors were also disappointed over the lower than expected rate cut...."

India Inc, however, welcomed the rate-cut and the accompanying accommodative stance.

"The RBI policy decision to change the policy stance to 'accommodative' will simultaneously help the financial system to navigate to a lower term structure of interest rates and also accommodate growth concerns," said Rajnish Kumar, Chairman of SBI.

According to Assocham President B.K. Goenka: "The 25 basis points cut in the benchmark lending rate by the RBI is a welcome measure. Equally significant is that the central bank has shifted its stance from 'neutral' to 'accommodative'. These measures would rekindle economic growth and improve business sentiments."

Ficci President Sandip Somany said: "We further hope that this third consecutive rate cut in repo rate will lead to effective transmission, encouraging banks to lower their lending rates for both retail and corporate credit. As of date, transmission has remained weak and ineffective largely due to tight liquidity conditions."