Home, auto and corporate loans may get cheaper as the India's Central Bank chief Governor Urjit Patel-led panel on Tuesday (Oct 4) marked its debut policy review with a surprise 0.25 per cent rate cut — lowering borrowing cost to 6-year low, which the industry lauded as a pre-Diwali gift.
In independent India's first collective interest rate setting decision, the 6-member Monetary Policy Committee, which has three members nominated by the government and the rest from the Reserve Bank of India, lowered repo rate to 6.25 per cent from 6.50 per cent.
First in six months, today's cut came amidst big clamour for easing rates especially after the departure of former Governor Raghuram Rajan, who was often accused by some sections, including those from the ruling BJP, of stifling growth by keeping rates too high.
The repo rate, at which RBI lends to banks, was 6.25 per cent in November 2010. It peaked to 8.5 per cent in October 2011. Within minutes of the RBI policy announcement, the government welcomed the rate cut saying it will boost liquidity and help achieve 8 per cent GDP growth.
"The Government has announced several measures to cool food inflation pressures, especially with regard to pulses. These measures should help in moderating the momentum of food inflation in the months ahead. This has opened up space for policy action, as indicated in the third bi-monthly monetary policy statement," Patel said in the fourth bi-monthly monetary policy review for 2016-17.
RBI's current rate cut along with reduction in small savings rates by the government will encourage banks to pass on the benefit to the borrowers, he said. "The easy liquidity conditions engendered by the Reserve Bank’s operations should also enable the smooth transmission of the policy action through various market segments," he said.
Following the rate cut, the BSE benchmark Sensex closed up by 91 points at 28,334.55. Finance Secretary Ashok Lavasa said the RBI policy will boost liquidity in the system and both the RBI and government are in sync with the inflation target.
"On the whole, this is a decision which will go down well with all sections of the economy," Lavasa said. When asked if banks will pass on rate cut, he said: "It depends on the banks. Banks also decides based on market sentiment".
Welcoming the rate cut as a 'pre-Diwali' gift, industry players hoped that banks would pass on the benefits and boost consumer sentiments in the ongoing festive season.
