RBI cuts repo rate by 25 bps to 6 per cent, second in two months
The central bank cut in repo rate could translate into cheaper loans.Updated: Apr 04, 2019 12:00 IST
The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) will announce its resolution under the first bi-monthly monetary policy statement for 2019-20 on Thursday. Economist and analysts expect a rate cut. The central bank is also expected to take a relook at its inflation numbers, growth target and the liquidity framework. Here is what you need to watch out in the RBI monetary policy announcement and its impact your money:
A cut in benchmark rates likely
Most economists predict a 25 basis points (bps) cut in repo rate, according to a Bloomberg survey. One bps is one-hundredth of a percentage point. Repo rate, the key policy rate, is the rate at which the central bank lends money to the banks. “Our base case expectation is of a 25 bps repo rate cut along with a dovish commentary to suggest more room to cut in the coming months,” said Arvind Chari, head –fixed income and alternatives, Quantum Advisors Pvt. Ltd.
The impact: A cut in repo rate can translate into cheaper loans. However, in the previous monetary policy, though the RBI had cut key policy rate by 25 bps to 6.25%, transmission continued to remain a problem. Considering the way floating rates are structured linked to marginal cost of funds based lending rate (MCLR), if you are an existing borrower you will not see an impact due to the reset clause. If you are a new borrower, you are likely to benefit from the rate cut.
RBI to address inflation, growth and liquidity
The apex bank’s inflation expectations continue to remain high despite low food prices. “In the last policy, RBI has estimated inflation for Q4FY19 at 2.8% which is likely to be breached on the downside, with January-February 2019 inflation at 2.3%. On the growth front, index of industrial production number, eight core data and auto sales has continued to show slack growth,” said Vinay Khattar, head of research, Edelweiss Financial Services in a note. Another concerning is liquidity in the system. “Despite RBI’s continued open market operations and the dollar-rupee swap, systemic liquidity as of March-end is in deficit. The tight liquidity is visible in high credit-deposit ratio and elevated corporate bond spreads. RBI’s commentary on liquidity should be closely watched,” said Khattar.
The impact: Despite rate cut, if the liquidity remains to be tight, you will not see any change in the deposit rate. Considering that tight liquidity is visible in high credit-deposit ratio, depositors haven’t seen a change in rates yet. If liquidity eases, you will see your FD rate fall.
Linking external benchmark rate to loans yet to happen: The RBI has in its December policy announcement had said that it is considering linking external benchmark rate such as olicy repo rate, 91 days treasury bill yield, 182 days treasury bill yield or any other benchmark market interest rate produced by the Financial Benchmarks India Pvt. Ltd to your home loan, car loans and personal loan instead of using MCLR. However, in the February policy announcement, the RBI said the proposal is under review. RBI governor Shaktikanta Das had then said it is currently under examination.
The impact: Even before the RBI’s announcement, State Bank of India, the country’s largest lender, has already linked external benchmark rate to its short-term loans and savings account above Rs 1lakh. If you loans get linked to external benchmark rate, you will see interest rate on your loans move faster than it does currently. Banks will also look at linked deposit rates to external benchmark rates.