In a pleasant surprise, RBI on Thursday cut its policy rate by 0.25% in the first reduction in 20 months and promised more, paving way for cheaper home and auto loans as also lower cost of funds for corporate borrowers.
While the government, industry and stock markets cheered RBI's much-awaited move, state-owned Union Bank and United Bank within hours lowered their respective benchmark lending rates by similar margin, giving relief to borrowers.
Others, including the PSU giant SBI and private sector major ICICI Bank indicated they will look at rate cuts soon to pass on the benefit to their customers from RBI's lowering of repo rate, at which banks borrow from the central bank.
"Reduction in the rates is a positive development. It will lead to more money in the hand of the consumers and greater spending. It's positive for the Indian economy," said finance minister Arun Jaitley, who has been nudging RBI for a rate cut for months now.
The industry has also been demanding an interest rate cut to lower their cost of capital and help revive the investment cycle. Jaitley said that the RBI decision would "certainly help in reviving investment cycle that the government is trying to restore".
The Reserve Bank cut the repo rate by 25 basis points to 7.75% with immediate effect, cheering the stock markets where the benchmark sensex soared by 847 points to 28,194 points during the intra-day trade.
RBI had last reduced the repo rate on May, 3, 2013, when it was lowered from 7.5% to 7.25%. Thereafter, the rates went higher and had remained steady at an elevated level of 8% since January 2014.
RBI Governor Raghuram Rajan, who had been maintaining a hawkish stance till now, decided to go in for rate cut a fortnight ahead of the scheduled date of announcement of monetary policy review on February 3.
The surprise early morning move, before the markets opened, came amid softening inflation levels and a reiteration by the finance ministry to stick to its fiscal deficit target of 4.1% for the current financial year.
Commenting on the rate cut, SBI Chairman Arundhati Bhattacharya said the country's largest lender "will look at how and when base (lending) rates can be cut", while ICICI Bank CEO Chanda Kochhar said that the much-awaited lowering of lending and deposit rates would definitely take place now.