Business
Loans could become cheaper as India's central bank cuts keys rates
Mumbai, March 4
Housing, auto and commercial
loans could become cheaper with the Reserve Bank of India cutting key
lending rates by 25 basis points in an unexpected move on Wednesday as
it expected inflation to soften further, sending stock indices soaring
during the bulk of the day.
Getting some positive cues from the
national budget tabled last week, and sensing an sustained economic
recovery, the repurchase (repo) rate has been cut to 7.5 percent from
7.75 percent and the reverse repo rate has been adjusted to 6.5 percent
from 6.75 percent.
The cuts follow a far-reaching agreement
between the government and the Reserve Bank of India (RBI) on Monday,
under which the central bank will aim to bring the country's retail
inflation below the 6-percent mark by January 2016 and to around 4
percent by the end of 2016-17.
The repo rate is the interest
commercial banks pay for borrowing money from the central bank to meet
short-term fund needs. The reverse repurchase rate is the interest
central banks pays on short-term funds parked with it. A cut makes
borrowing money cheaper for commercial banks.
The announcement,
which came just ahead of the opening bell for stock markets, brought
much cheer to sentiments, prompting the sensitive index (Sensex) of the
Bombay Stock Exchange to open nearly 345 points higher, over the
previous close at 29,593.73 points.
The key index soon breached the 30,000-point mark to touch a historic high of 30,024.74 points.
The situation was similar at the National Stock Exchange, where the Nifty also hit an all-time high.
But
both indices came under a major spell of profit-taking during the last
one hour of trading and ended in the red, losing between 0.72 and 0.82
percent as per provisional data. For the 30-share Sensex, it means an
intra-day fluctuation of some 735 points.
Industry, too, welcomed
the rate cuts, the second such downward revision in two months, even as
some commerial banks, led by the largest private sector lendwer, the
State Bank of India (SBI), indicated that they could pass on the rate
cuts to their customers.
The finance ministry laued the decision
and said it was a vote of confidence on the steps taken by the
government on fiscal consolidation and would lower the cost of loans for
people at large. "More rate cuts will depend on future data," Minister
of State for Finance Jayant Sinha said.
"To summarise, softer
readings on inflation are expected to come in through the first half of
2015-16 before firming up to below 6 percent in the second half,"
Reserve Bank of Governor Raghuram G. Rajan said in a statement.
"The
fiscal consolidation programme, while delayed, may compensate in
quality, especially if state governments are cooperative," said the
governor who has otherwise been taking a rather conservative approach in
dealing with the monetary policy, especially the interest rates.
"Given
low capacity utilisation and still-weak indicators of production and
credit off-take, it is appropriate for the Reserve Bank to be
pre-emptive in its policy action to utilise available space for monetary
accommodation."
In its monetary policy statement of Jan 15, 2015
the Reserve Bank had reduced the repo rate by 25 basis points, and
said: “Key to further easing are data that confirm continuing
disinflationary pressures."
But it maintained its interest rate
stance in its sixth bi-monthly monetary policy statement of Feb 3 in the
absence of new developments on inflation or on the fiscal outlook,
awaiting signals on that count and from the national budget.
While
the next bi-monthly policy statement will be issued April 7, 2015 the
still weak state of some sectors and the global trends, prompted the
central bank, in its own admission, to become more anticipatory to make
changes immediate in its stand.
In his statement on Wednesday,
Rajan also lauded the Central Statistics Office (CSO) for the changes it
made in the national income accounting, on which is based the country's
gross domestic product estimation, to bring it up to international
standards.
"Yet the picture it presents of a robust economy, with
growth having picked up significantly over the last three years, is at
odds with still-low direct measures of growth of production, credit,
imports and capacity utilisation as well as anecdotal evidence on
economic cycle," he said.
"Nevertheless, the picture of a steadily recovering economy appears right," he added.
"Going
forward, the RBI will seek to bring the inflation rate to the mid-point
of the band of 4 percent (plus or minus 2 percentage points) provided
for in the agreement, that is to 4 percent by the end of a two-year
period starting fiscal year 2016-17."