Home and car loans, as well as personal loans, will soon become cheaper with the quarter per cent (25 basis points) cut in the repo rate (rate at which banks borrow from the RBI) and several other mea
Home and car loans, as well as personal loans, will soon become cheaper with the quarter per cent (25 basis points) cut in the repo rate (rate at which banks borrow from the RBI) and several other measures to increase liquidity in the banking system that were announced by RBI governor Raghuram Rajan in his credit policy statement Tuesday.
This cut has brought the short-term lending rate down to 6.5 per cent, the lowest in five years. Dr Rajan said: “You will see a significant more transmission of cuts in the next few months.”
The policy objective was to hike liquidity in the banking system to enable banks to transmit the 125 bps (1.25 per cent) cuts made so far, he said at a press briefing. It will be the RBI’s endeavour to ensure that the banks pass on the rate cuts to their customers.
Stressing the significance of the 25 bps cut, Dr Rajan said it should be looked at in conjunction with the new minimum cost of funds loan pricing (MCLP) method announced last week, which has already led to lending rates coming down by up to half a per cent, or 50 bps. In addition, he announced several other liquidity-boosting steps like injecting an average of daily liquidity of over Rs 1.93 lakh crores between January and March 2016, from Rs 1.34 lakh crores earlier; Rs 51,400 crores was pumped in through open market operations and Rs 37,500 crores through buyback operations in February and March.
Dr Rajan made a strong case on behalf of borrowers, investment and the economy for banks to transmit the rate cuts. In addition, small savings rates were also cut recently to facilitate lending by banks, that felt the higher rates they offered affected the deposit cost of banks.
To boost micro, small and medium industries, the RBI will also appoint credit counsellors who will act as facilitators for them to access the formal financial system with greater ease and flexibility. The RBI retained GDP growth rate for 2016-17 at 7.6 per cent given headwinds like fading impact of lower input costs on value addition in manufacturing costs, persisting corporate sector stress and risk aversion on the banking system and weaker global growth and trade outlook.
This rate cut is expected to give a boost to corporates who were shying away from investments. The Sensex gave the policy a thumbs down, plunging 516 points. The industry reaction was a mixed bag, with Hemant Kanoria, CMD of Srei infrastructure Finance Ltd, saying a 25 bps cut was a positive move, but more cuts were needed to rejuvenate the Indian economy and revive the domestic investment cycle. Sanjay Dutt, managing director (India) of Cushman & Wakefield, said the cut would have a positive impact on real estate in lower home loan interest rates, lower construction costs or cost of debt to developers could possibly see a sale of unsold inventory and ease the pressure on interest outgo, “resulting in an improvement in the bottomline of companies.” Tulsi Tanti of Suzlon Group sounded confident that the rate cut could add momentum to the renewable energy industry and enable the achievement of the ambitious target of 175GW by 2022. “The renewable energy industry poses a $200 billion opportunity and the rate cut will be a catalyst for the nation’s economic development,” he said.
Asked about cybersecurity after the recent attack on the Bangladesh central bank, Dr Rajan said the RBI had begun a detailed examination of the IT used by banks on a pilot basis, and a report will be released separately on how to strengthen the IT security preparedness of banks and assess the effectiveness of IT adoption by banks. On the “Panama Papers” revelations, of offshore bank accounts held by Indians, Dr Rajan cautioned: “We have to see what is legitimate and what is not legitimate as there are schemes by which Indians are permitted to have accounts abroad.”
