RBI cuts rate 0.35 per cent, EMIs set to fall

Mumbai: Your home, auto and personal loans rates are likely to fall but your fixed deposits will fetch lower returns. The Reserve Bank of India’s Monetary Policy Committee, at its third bi-monthly monetary policy review Wednesday, cut the policy repo rate for the fourth straight time in a row, this time by an unconventional 0.35 per cent, to arrest the all-pervasive slowdown in the economy. In another move to boost consumption, the RBI reduced the risk weights or capital that banks need to set aside on personal loans making them cheaper. Soon after the policy announcement, the country’s largest lender, State Bank of India, cut its Marginal Cost of Funds based Lending Rate (MCLR) by 15 basis points (bps) across all tenure with effect from August 10. Other lenders too are likely to follow suit.

The 35 basis points (bps) cut in the repo rate is unusual, as the RBI has been changing the interest rate by 25 or 50 bps in the past. When asked why the RBI opted for a 35-basis point rate cut, RBI governor Shaktikanta Das said it was not unprecedented, and added that a 25-basis point cut was inadequate while 50 bps was excessive, so the MPC took a balanced call.

While a reduction in MCLR by banks will give immediate relief to new borrowers, it will translate in lower EMIs for old borrowers only when their reset date of their home loan arrives. In the last few days, several lenders like HDFC Bank, HDFC and Bank of Baroda have cut their loan rates.

Attributing the slowdown to both a demand as well as investment slowdown, Mr Das said: “Both demand and investment put together are having a dampening effect on growth.”

The RBI itself has reduced its growth estimate down to 6.9 per cent for FY20, from the seven per cent it had projected in its June policy.

After the reduction in MCLR, SBI’s one-year MCLR, which is used to price home, car loans, will be 8.25 per cent per annum as compared to the existing 8.40 per cent.

 “With today’s MCLR cut, home loans have become cheaper by 35 bps since April 10, 2019,” said SBI in astatement. In addition, SBI is offering a Repo Linked Home Loan Product from July 1. “With today’s cut in the policy rate, SBI’s effective Repo Linked Lending Rate for cash credit and overdraft customers will stand revised to 7.65 per cent with effect from September 1,” said the lender.

In the three previous monetary policy reviews this year, the RBI reduced the benchmark repo rate by 0.25 per cent each time. By adding this rate cut, in total, the central bank has reduced the repo rate by 1.10 per cent since February. However, the banks have been slow in passing on the benefit of lower rates from the central bank to their borrowers.

According to the RBI data, banks have cut their loan rates for new borrowers by only 29 basis points during the current easing phase so far (February-June 2019).

The repo rate is that at which the RBI lends money to commercial banks and it currently stands at 5.40 per cent, the lowest since July 2010. Banks have blamed their inability to cut high deposit rates and thereby have less room to cut loan rates, resulting in slower monetary transmission.

The RBI governor, in his policy press conference, said he expects banks to transmit the policy cuts in a faster manner. “In my interactions with banks, they indicated they are progressively taking steps to lower their interest rates so the benefits of policy rate cuts are reflected,” Mr Das said.

While all six members of the MPC were in favour of a rate cut, two members voted for a 25 bps cut and four members voted for a 35 bps rate cut. The RBI has painted a reasonably gloomy picture for the economy and revised GDP growth from seven per cent to 6.9 per cent. The central bank expects growth to be at 5.8 per cent to 6.6 per cent in H1 and 7.3 per cent to 7.5 per cent in H2 FY20 on concerns over subdued domestic economic activity (on account of muted private consumption and investments) along with worries over global economic slowdown after intensifying trade tensions between the United States and China.

The RBI kept its inflation forecasts broadly unchanged at 3.1 per cent in Q2 and 3.5 per cent to 3.7 per cent in H2. Given the downside risks to growth and with inflation in all likelihood remaining low, bankers and economists expect the central bank to cut rates more this year.