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RBI cuts key lending rate by 25%; loans likely to get cheaper

Friday, February 08, 2019

In the first interest rate cut in 18 months, the RBI yesterday shed its hawkish stance to reduce policy rates in the maiden policy meeting under new Governor Shaktikanta Das, a move that may make home and other loans cheaper. Coming just months ahead of the general elections, the move will help boost lending and support the government's efforts to boost a slowing economy after it last week unveiled an expansionary budget which included a Rs 75,000 crore cash dole to small farmers and income tax rebate to the middle class.

The Reserve Bank of India's six-member monetary policy committee (MPC) cut the repo rate by 25 basis points to 6.25% as inflation continues to remain benign.

While four out of the six members, including Das, voted for a reduction in interest rate, all the six members unanimously favoured switch in stance to 'neutral' from 'calibrated tightening' adopted in October. Emboldened by a slowdown in inflation which fell to 18-month low of 2.19% in December and is expected to be in the range of 3.2-3.4% in April-September to 3.2-3.4 percent - lower than previous RBI prediction of 3.8-4.2% range, Das-led MPC weighed more concern about economic growth risks, paving the way for more rate cuts.

Besides repo rate, reverse repo was reduced to 6% from 6.25%. Repo rate is the rate at which commercial banks borrow money from the RBI; while reverse repo rate is the rate at which RBI collects money from banks.

Das, who unlike his predecessor Urjit Patel is seen more amenable to government demands for boosting credit growth, said it was "vital to act
decisively and in a timely manner to address the objective of growth once price stability as defined (in RBI's inflation-targeting mandate) is achieved."

A former bureaucrat, Das was appointed RBI Governor in December as Patel quit amid a debate over central bank's autonomy.

"The shift in stance from calibrated tightening to neutral provides flexibility to address, and the room to address, sustained the growth of India's economy over the coming months as long as inflation remains benign," he said.

Opinion from experts
There are several innovative announcements in policy apart from a rate cut that could potentially trigger a new paradigm for financial markets. The decision to rationalise the risk weights for on lending to rated NBFCs will enable better price discovery, lower capital requirement and facilitate credit flow from the banks. Opening up the ECB route for applicants under the IBC could facilitate a faster turnaround. The proposal to rationalise interest rate derivative regulations will provide the desired boost to the ultimate goal of developing a dynamic environment for management of interest rate risk.
—Rajnish Kumar, Chairman, SBI

As a major step, RBI has reduced Risk weight for rated exposure on NBFCs-ND-SIs from existing 100% to risk weights based on their respective external ratings, in manner similar to that for corporates. This will enable stronger/well rated NBFCs to raise more funds at competitive price. RBI has also raised the limit of collateral free agriculture loan from Rs.1 lakh to Rs.1.60 lakhs. This will enhance coverage of small & marginal farmers in formal banking system and will help in growth of agricultural activities and agrarian economy.
Dinabandhu Mohapatra, MD & CEO, Bank of India

This will give further boost the economic growth, but in view of the low inflation RBI could have considered 50 bps. RBI vide its notification dated 12th February 2018 has done away with the Strategic Debt Restructuring (SDR) AIAI feels that Circular of February 12th  should be withdrawn by RBI to allow bank to go ahead with restructuring of industry and infra projects . As it is not only impacting NPA settlement process also resulting in fear psychosis to entrepreneurs and loss of job rather than creating jobs. RBI should further consider relaxation in Basel Norm III, to bring in the much needed liquidity to industry and trade.
Vijay G. Kalantri, President, All India Association of Industries

Reduction in repo rate and recalibration of monetary policy outlook to neutral will improve sentiments. It was a right step to take when headline inflation is ruling at record low. It should lead to reduction in cost of borrowing as banks are expected to reduce MCLR, thus leading to reduction in microfinance lending rates to borrowers.
Kuldip Maity, MD & CEO, Village Financial Services Ltd.

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