RBI makes surprise cut in interest rate, home loans could get cheaper

RBI makes surprise cut in interest rate, home loans could get cheaper

India's central bank cut interest rates on Thursday, giving a surprise boost to Prime Minister Narendra Modi ahead of general elections due this year. This is the first time the repo rate has been cut since August 2017.

In the past, even when the RBI has signalled lower rates, this rate transmission never really happened because banks always found a way to ignore the central bank's policy cues.

This was the first meeting of the monetary policy committee (MPC) under Shaktikanta Das who took over as the RBI governor in December after the sudden exit of Urjit Patel over differences with the Modi government.

Addressing the media on MPC's decision, Das said that GDP projection for 2019-20 is 7.4%. The central bank also announced that the limit of collateral-free agriculture loans was being raised from Rs 1 lakh to Rs 1.6 lakh.

"Investment activity is recovering but supported mainly by public spending on infrastructure", the MPC said in a statement, adding there is a need to strengthen private investment and buttress private consumption. Past three governors have been blaming the banks for not passing on their rate cuts to customers, thus offsetting the efforts of the monetary authority to lower interest cost for the economy.

The committee though flagged external headwinds including trade tensions, and crude oil prices, which though appear well-behaved now.

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It further said that in spite of soft crude oil prices and the lagged impact of the recent depreciation of the Indian rupee on net exports, slowing global demand could pose headwinds.

The former finance secretary-turned governor explained that the price stability is defined as keeping the headline inflation number at the mandated 4 per cent in the medium-term and asserted that the Monetary Policy Committee has not done anything beyond the provisions of the RBI Act.

The inflation rate is estimated at 3.2-3.4% in the first half of the year 2019-20 and 3.9% in the third quarter of 2019-20, he said.

In another measure, resolution applicants under corporate insolvency resolution process (CIRP) will also be allowed to avail of external commercial borrowings (ECBs) to repay existing lenders. "We thought that the oil had just eased after the October policy, it was not prudent to withdraw the tightening policy stance right away in December itself", Acharya said. The MPC voted 4:2 in favour of the rate cut, while the decision to change policy stance was unanimous.

The RBI, however, said that "some uncertainties warrant careful monitoring", flagging seven key issues.

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