Much awaited RBI rate cut a festive gift, says auto industry

by Ben Pena October 6, 2016, 5:57
Much awaited RBI rate cut a festive gift, says auto industry

In independent India's first collective interest rate setting decision, the 6-member Monetary Policy Committee, which has three members nominated by the government and the rest from the Reserve Bank, lowered repo rate to 6.25% from 6.50%.

Experts opine that the forthcoming festive season and rationalisation of food prices provides an opportunity to revive demand, and consequently industrial growth.

The issue of non-performing assets (NPAs), or bad loans, particularly of state-run banks, needs to be dealt with firmly, as well as with pragmatism to ensure that economic activity is not affected by drying up of credit, Reserve Bank of India Governor Urjit Patel said on Tuesday. Reverse repo rate under the LAF stands adjusted to 5.75 per cent, and the marginal standing facility (MSF) rate and the Bank Rate to 6.75 per cent.

RBI's current rate cut along with reduction in small savings rates by the government will encourage banks to pass on the benefit to borrowers, Patel said. For those who borrowed before April 1, the interest rate will depend on the base rate of the banks.

Economists say consumer price inflation should remain close to the range the central bank is comfortable with as abundant monsoon rains could lead to a bumper crop and cool food prices.

India cut interest rates Tuesday, citing growing risks to the world's fastest growing major economy. Therefore, we can expect only a marginal improvement in sentiment on the back of this rate cut. "I agree that transmission to borrowers has been less than what anyone of us would have liked, and we are hoping that, over the next quarter or two, this will improve", said Patel.

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Similarly, Syndicate Bank said it has cut its MCLR for one year to 9.45 per cent from 9.55 per cent effective from October 7. How much will you save on home loan? .

But, anything beyond the expected cut in December would require CPI to sustainably undershoot the expected inflation trajectory. This has opened up space for policy action, as indicated in the third bi-monthly monetary policy statement.

Since January 2015, the policy rate has been reduced by 1.5%, excluding Tuesday's cut.

However, consumers may not benefit from this reduction in cost as banks are still struggling to pay higher interest on deposits.

"In its Monetary Policy Report, the RBI notes that while a number of factors have contributed to a relatively benign inflation environment and the MPC envisages inflation to trend towards 5 per cent by March 2017, the MPC does note that there are risks of upward adjustments to this projection", he added.

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