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Rajan cuts key lending rate, gives hope to home buyers

A lower repo can lead to lower floating home loan rates, which move in tandem with base rates, and bring cheer to millions of millions of home loan borrowers as they can expect their EMIs to come down.

business Updated: Sep 29, 2015 12:03 IST
HT Correspondent
HT Correspondent
Hindustan Times
RBI,Monetary policy,Raghuram Rajan
Reserve Bank of India governor Raghuram Rajan speaks during a gathering of industrialists and bankers in Mumbai. The RBI has made four rate cuts since January.(REUTERS)

The Reserve Bank of India (RBI) on Tuesday cut its key lending rate--the repo rate--by 0.50 percentage points to 6.75%, setting the stage for lower loan rates for consumers ahead of the festival season and cheaper bank capital for companies to aid investment.

This is the fourth rate cut by RBI since January largely aided by low inflation rates signalling a definitive change in RBI’s stance from steadfast focus on controlling prices to hand-holding growth.

The central bank, however, made it clear that conditions continue to remain shaky effectively putting the economy on notice.

It also placed the onus firmly on the industry, which has been ratcheting up their demand for lower loan rates, to take the cue and invest more.

“In India, a tentative economic recovery is underway, but is still far from robust,” said RBI governor Raghuram Rajan as he cut the RBI’s GDP growth forecast for 2015-16 to 7.4% from the earlier 7.6%.

Rajan also kept two key main rules unchanged disappointing markets, which were expecting the central bank to cut the statutory liquidity ratio (SLR) and the cash reserve ratio (CRR) that would have given banks more funds to lend and enable them to lower loan rates.

A lower repo will bring down banks’ borrowing costs, which in turn, may prompt them to slash their “base rates”, the floor interest rate on which lending rates for final home, auto and corporate borrowers are fixed.

The repo rate cut, however, will likely goad companies to invest, add capacities, hire more, and prompt people to spend on houses, cars and other goods, which mostly peak during the festival season during October-December.

A lower repo can lead to lower floating home loan rates, which move in tandem with base rates, and bring cheer to millions of millions of home loan borrowers as they can expect their EMIs to come down.

The RBI also expects inflation to creep up to 5.8% by January 2016 from the current historically low levels.

While the August wholesale price index (WPI) fell 4.95%, compared with 4.05% decline in the previous month, the retail inflation rate rose 3.66%, a tad slower than the 3.69% rise in July.

“Taking all this into consideration, inflation is expected to reach 5.8% in January 2016,” the RBI said.

Sown area has expanded modestly from a year ago given a 14% shortfall in monsoon rains this year, although the first advance estimates indicate that food grain production is expected to be higher than last year, reflecting actions taken to contain the adverse effects of rain deficiency through timely advisories and regular monitoring of seed and fertiliser availability.

“Rural demand, however, remains subdued as reflected in still shrinking tractor and two-wheeler sales,” the RBI said.

The RBI’s observations are corroborated by shop-end data that show that households were not buying goods at a pace to pull growth in the broader economy. Car sales, for instance, have grown at a muted 7.4% during in 2015-16 so far.

Still-low industrial capacity utilisation indicates more domestic demand is needed to offset the affects of weakening global demand in order that the domestic investment cycle picks up.

The RBI expects seventh pay commission report boost consumer spending, and therefore, investment.

The new pays will take effect from January 1, 2016. The last salary revision, which took effect from January 1, 2006, saw pay cheques rise by an average 21%, costing the government an extra Rs 17,000 crore annually. The employees also got one-off arrear payments of about Rs 27,000 crore, driving up spending on assets, from cars to property.

“The Pay Commission report could add substantial fiscal stimulus to domestic demand,” RBI said.

Furthermore, investment is likely to respond more strongly if there is more certainty about the extent of monetary stimulus in the pipeline.

“Therefore, the Reserve Bank has front-loaded policy action by a reduction in the policy rate by 50 basis points (0.50 percentage points),” it said as it laid down the reasons for an unexpectedly higher cut in its key lending rate.

First Published: Sep 29, 2015 11:21 IST