Home, auto and other loans may cost less, if the RBI rate cut – the lowest level in nine years – is passed on by banks to consumers. For the RBI, it was a hat-trick of rate cut as it lowered its key lending rate for commercial banks by 25 basis points (bps) to 5.75 per cent. This is the third reduction in repo rate in 2019. Besides, the RBI changed the monetary policy stance from neutral to accommodative. The significance of such a move can be gauged by the fact that the RBI has reduced its growth forecast to 7 per cent in 2019-20 from 7.2 per cent.
Additionally, RBI Governor Shaktikanta Das said that the central bank would make sure that the transmission of the reduced repo rate by the banks to the consumer would be faster and higher. In the absence of complete transmission of lower lending rates, consumers pay higher EMI while corporates’ repayment burden remains high. The decision to reduce the repo rate was taken by the RBI’s Monetary Policy Committee at its second monetary policy review of the ongoing fiscal. As per the monetary policy statement, the main considerations behind the MPC’s decision were decline in private final consumption expenditure (PFCE) and moderation in exports.
All the six members of the Monetary Policy Committee voted unanimously for a rate cut Currently, high interest rates and liquidity constraints have demoralised auto, home and capital goods buyers. Even the high frequency indicators suggest moderation in activity in the service sector. Accordingly, a lower repo, or short-term lending rate for commercial banks, will reduce interest cost on automobile and home loans, thereby ushering in growth. “A sharp slowdown in investment activity along with continuing moderation in private consumption growth is a matter of concern. The headline inflation trajectory remains below the target mandated to the MPC even after taking into account the expected transmission of the past two policy rate cuts,” the policy statement said.
“Hence, there is scope for the MPC to accommodate growth concerns by supporting efforts to boost aggregate demand, and in particular, reinvigorate private investment activity, while remaining consistent with its flexible inflation targeting mandate,” it said. However, equity investors’ were disappointed over the lower-than-expected rate cut. “Markets were disappointed over the fact that there were no immediate liquidity boosting measures that were announced. Though the RBI has constituted a working group on the same. Investors were also disappointed over the lower than expected rate cut and on the back of the DHFL default,” Deepak Jasani, Head of Retail Research, HDFC Securities, said.