RBI cuts interest rate by 0.5% to boost growth

Mumbai: In a big boost to the economy and borrowers, the Reserve Bank today cut interest rate by 0.50 per cent and relaxed norms for home loan seekers.

In its monetary policy review, RBI reduced the key rate (repo) by 50 basis points from 7.25 per cent to 6.75 per cent with immediate effect. The central bank cut the GDP forecast to 7.4 per cent for the current fiscal from (rpt) from 7.6 per cent, while projecting retail inflation at 5.8 per cent for January.  RBI kept the cash reserve ratio (CRR), portion of deposits mandatorily kept by banks with the central bank, unchanged at 4 per cent. Consequently, the reverse repo rate adjusted to 5.75 per cent, and the marginal standing facility (MSF) rate and the Bank Rate to 7.75 per cent.

RBI Governor Raghuram Rajan said: “Further monetary policy accommodation will be conditioned by the abating of recentinflationary pressures, the full monsoon outturn, possible Federal Reserve actions and greater transmission of its front-loaded past actions.” Looking forward, he said inflation is likely to go up from September for a few months as favourable base effects reverse. “The outlook for food inflation could improve if the increase in sown area translates into higher production. Moderate increases in minimum support prices should keep cereal inflation muted, while subdued international food price inflation should continue to put downward pressure on the prices of sugar and edible oil, and food inflation more generally,” he said.

Taking all this into consideration, he said, inflation is expected to reach 5.8 per cent in January 2016, a shade lower than the August projection. In a bid to give boost to housing sector, the RBI proposed to reduce the risk weights on affordable housing applicable to lower value but well collateralised individual housing loans. At present, the minimum risk weight applicable on individual housing loans is 50 per cent, it said.

Rajan also affirmed RBI’s commitment to be “accommodative” in the future even after today’s “front loaded” action. “The bulk of our conditions for further accommodation have been met,” Rajan said in the fourth bi-monthly review of the monetary policy in the current fiscal. The repo rate, at which RBI lends to the system, has now come down 6.75 per cent, the reverse repo rate at which it accepts banks’ excess liquidity will be 5.75 per cent, while the cash reserve ratio has been kept unchanged at 4 per cent.

This is the fourth policy rate cut by Rajan this year, and takes up the cumulative rate cuts to 1.25 per cent. The RBI has been under pressure from various quarters to give a fillip to the sagging growth by a rate cut, and itself acknowledged the need to do so when it cut its growth projection by 0.2 per cent to 7.4 per cent for the fiscal. “Continuing policy implementation, structural reforms and corporate actions leading to higher productivity will be the primary impetus for sustainable growth,” Rajan said. He made it clear that the RBI has “front-loaded policy action by a reduction in the policy rate by 0.50 per cent”, and this action shall ensure that the real interest rates will continue to be in the 1.5-2 per cent band.

Rajan reiterated the need for banks to pass the benefits of the RBI actions to their lending rates and added that with this cut, the focus of the monetary policy will now shift to working with the government to remove impediments to pass a bulk of the cumulative 1.25 per cent cuts to borrowers. Banks have so far passed only an average of 0.30 per cent to the borrowers as against RBI’s 0.75 per cent cut and blame the delays in repricing of deposits for the lag. He added that deposit rates have “reduced significantly” and further transmission “is possible”. The central bank is targeting to get headline inflation at 6 per cent by January 2016 and Rajan said it will reach 5.8 per cent by then. In the way forward, the focus will now shift to getting the number down to 5 per cent by FY17. Largely due to the base effects, the number had come at 3.66 per cent in August.

Apart from the rate action, Rajan introduced a slew of actions on the financial markets front, starting with setting the foreign portfolio investment limits in rupee terms, rather than in dollars.

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