The Reserve Bank of India (RBI) cut its main lending rate — the repo rate — by 0.25 percentage points in a surprise announcement on Wednesday rekindling hopes of home loan rates falling below 10% for the first time in seven years. RBI governor Raghuram Rajan expects banks to cut lending rates by April.
“My hope is that over the span of the next few weeks, as we move in to the new fiscal (beginning April), we will see more transmission into lower interest rate,” Rajan told analysts over a conference call after the surprise action in the morning in which he cut the repo rate — the rate at which banks borrow from RBI — to 7.5%.
A lower repo lowers banks’ borrowing costs, which could goad them to cut home, auto and corporate loan rates.
Low and inflation rates in recent months have helped RBI cut rates — the second in two months — amid growing chorus from business leaders arguing the central bank should cut lending rates, which will lower EMIs, spur spending, cut companies’ borrowing costs and aid investment.
The latest rate could enable some banks to slash home loan rates below 10% — a level last seen in 2008 — a sweetspot that can push home purchases, boost construction activity, create jobs and revive investment across sectors.
“Our bank will take an appropriate call of a cut in base rate by looking at all evolving circumstances,” said Arundhati Bhattacharya, chairperson of SBI, India’s largest lender, which offers home loans at 10.10% interest rate to some category of borrowers.
RBI had last cut the repo rate on January 15 by 0.25 percentage points to 7.75%.
Retail inflation — a measure of shop-end price movements — was 5.11% in January much lower than the target of 6% by January 2016.
The latest cut comes four days after finance minister Arun Jaitley presented the budget for 2015-16 and two days after the government and the RBI announced that they have agreed to adopt a monetary policy framework, which will make taming inflation the primary priority of the central bank’s policy decisions.
Under the new system, billed as biggest monetary reform measure in a generation, the RBI has set a new retail inflation target of below 6% by January 2016 and 4% by March 2017.