SME Times News Bureau | 07 Aug, 2019
The Reserve Bank of India on Wednesday cut its key
lending rates by 35 basis points, a move that is expected to make home and auto
loans cheaper and rev up the economy by unleashing consumption-led demand.
The RBI's monetary policy committee (MPC) in its third policy review of the
current fiscal reduced the repo, or short-term lending rate for commercial
banks, by 35 basis points to 5.40 per cent from 5.75 per cent.
The reverse repo rate was revised to 5.15 per cent, and the marginal standing
facility (MSF) rate and the bank rate to 5.65 per cent.
Besides reducing key lending rates for the fourth consecutive time, the MPC
maintained its accommodative stance of the monetary policy.
A lower repo lending rate for commercial banks, will reduce interest cost on
automobile and home loans, thereby ushering in growth.
Currently, high GST tax rate, along with stagnant wages, farm distress and
liquidity constraints have demoralised auto, home and capital goods buyers.
Even the high frequency indicators suggested moderation in economic activity.
As per the monetary policy statement, the MPC was of the view that the standard
25 basis points reduction might prove to be inadequate in view of the evolving
global and domestic macroeconomic developments.
Acknowledging the departure from the standard policy of reducing or increasing
key rates in the multiples of 25, RBI Governor Shaktikanta Das said the
practice was not "sacrosanct" and that the MPC found 35 basis points
as sufficient for the time period, as 25 basis points would have been
"inadequate" and 50 would have been "excessive".
Historically, the central bank has been either reducing or increasing rates in
the multiples of 25 basis points.
On the growth front, the MPC reduced its forecast to 6.9 per cent from 7 per
cent in FY2019-20.
The GDP growth for the first quarter of FY2020-21 is projected at 7.4 per cent.
In the June resolution, MPC had projected the real GDP growth for 2019-20 at 7
per cent -- in the range of 6.4-6.7 per cent for H1:2019-20, and 7.2-7.5 per
cent for H2 -- with risks evenly balanced.
However, MPC said the impact of monetary policy easing since February 2019 is
also expected to support economic activity, going forward.
Nonetheless, equity investors were disappointed, as there were no announcements
on new measures to boost consumption.
The S&P BSE Sensex closed 286.35 points or 0.77 per cent lower at 36,690.50
points, while the NSE Nifty50 was down 92.75 points or 0.85 per cent at
10,855.50 points.
"Markets reacted negatively immediately to the 35 bps cut in repo rate cut
largely on the basis of "sell on news" reaction even as the cut was
more than the majority expectations," said Deepak Jasani, Head of Retail
Research, HDFC Securities.
Industry-body Ficci's President Sandip Somany said: "With today's cut, RBI
has lowered the policy rate by 110 basis points in the current calendar
year."
"The central bank has also kept liquidity in the surplus mode, and it is
now critical for banks to move fast and transmit this ease in policy rate in
the form of lower lending rates."
PHD Chamber of Commerce and Industry President Rajeev Talwar said the cut would
help to rejuvenate consumption and increase competitiveness of the producers
with reduced cost of capital.
According to ICRA's Principal Economist Aditi Nayar: "The unconventional
35 bps rate cut is a clear signal that the increasing evidence of a pervasive
slowdown in economic growth has emerged as the MPC's chief concern, given that
it expects inflation to remain under its medium-term target."
SBI Chairman Rajnish Kumar said: "On the development and regulatory front,
the decision to make available the NEFT platform on 24/7 basis, coupled with
on-tap authorisation, will add depth to retail payments."
"Reduction in risk weightage for consumer credit will free up capital from
the banking sector for productive use. Similarly, permitting Banks to on-lend
through NBFCs will facilitate credit flow to priority sectors."
In a related development, SBI has decided to cut repo linked lending rate by 35
bps and MCLR by 15 bps effective August 10.