RBI asks banks to lower rates further

Lucy Hill
August 3, 2017

India's Monetary Policy Committee (MPC) of Reserve Bank on Wednesday cut repo rates by 25 basis points (bps) to 6 percent, lowest in the last seven years, but home loans Equated Monthly Installments (EMI) won't be slashed. He also said that inflation is expected to increase with the current fiscal.

After days of record highs, India's benchmark indices closed on a low note on Wednesday, following the Reserve Bank of India's decision to cut its policy rates by 25 basis points to 6% from 6.25%.

The MPC also noted that inflation is well below target in most of advanced and emerging market economies despite a modest rise in global demand as well as uptick in crude oil. In the previous meeting of the MPC in June, the policy rate was left unchanged at 6.25%.

Radhika Rao, economist at Singapore-based DBS Bank, said the neutral policy stance "will allow the RBI to be noncommittal on the future course of action, retaining the flexibility to react to the evolving inflation trajectory". Given the liquidity situation prevailing in the market post demonetisation, there is scope for banks to cut their lending rate further.

RK Arora, chairman, Supertech feels with the rate cut prior to start of festival season, the sluggishness in the real estate sector would come to an end.

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Lowering of the repo rate by RBI is a signal to lenders to bring down their rates. RBI has acknowledged the low capacity utilization in the industrial sector, actual CPI inflation undershooting its baseline forecast.

Expecting further steps to curb the surplus liquidity into the market causing inflation Rakesh Yadav, Chairman, Antriksh India Group said, "The sector was hopeful for a rate cut today and after nearly 9 months, RBI has decreased the key rate by 25 basis points".

One basis point is one-hundredth of a percentage.

"While the extent of change in Base Rate may not necessarily mirror the revision in MCLR, the rigidity of Base Rate is a matter of concern for an efficient transmission of monetary policy to the real economy", the apex bank said. Yes Bank MD and CEO Rana Kapoor said: "India's inflation has undergone a structural shift, with the emergence of "new normal" at lower levels".

A State Bank of India (SBI) report said that most inflation risks are now on the downside and retail inflation is expected to be below 3 per cent for August-September, under 4 per cent for October-November, and between 4-4.5 per cent for December to March next year.

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