Benefit of latest RBI rate cut only if banks lower lending rates
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Benefit of latest RBI rate cut only if banks lower lending rates

With the latest cut, the repo rate stands at 6.5 per cent, the lowest since March 2011. The RBI also reduced the minimum daily maintenance of the cash reserve ratio (CRR) from 95 per cent of the requirement to 90 per cent from April 16.

  • New Delhi,  April 5, 2016  
  • |  
  • UPDATED   13:49 IST

The Reserve Bank of India (RBI) on Tuesday cut the repo rate of the rate at which banks borrow from the central bank by 25 basis points. One basis point is one-hundredth of a percentage point.

With the latest cut, the repo rate stands at 6.5 per cent, the lowest since March 2011. The RBI also reduced the minimum daily maintenance of the cash reserve ratio (CRR) from 95 per cent of the requirement to 90 per cent from April 16.

It also cut the reverse repo or the rate at which banks park excess funds with the RBI, to 6 per cent.

However, the real benefit for the end customer will kick in only if banks take the cue from the central bank and reduce their lending rates.  'Banks have said there is not enough liquidity. Now we have given them more liquidity, banks can transmit more," said RBI Governor Raghuram Rajan addressing the media in Mumbai.

The Confederation of India Industry said that the reduction in repo rate sends a strong signal that the RBI is continuing to maintain an accommodative bias in favour of growth in view of the benign inflation trajectory and deficient demand in the economy. Besides, for the first time, the RBI has narrowed the policy rate corridor by increasing the reverse repo rate by 25 bps. This along with measures to improve liquidity in the system would enable better monetary policy transmission and improve the availability and cost of credit to industry, it said.

The CII stated that the rate cut from the RBI could have been higher in the current economic conditions which would have had a stronger impact on business sentiment and spurred investment in a big way. Factors such as soft global commodity prices, expectations of a normal monsoon, cut in small savings rate and the government delivering on fiscal prudence in the Budget have made it the right time for the RBI to take monetary policy action and lean more towards growth.

"A 25 bps cut in policy rate is extremely encouraging and will definitely provide a huge fillip to the real estate industry that is currently facing a tough time," said Shishir Baijal, Chairman and Managing Director of property consultant Knight Frank. "We hope that the banks will pass on the benefit to the consumers." This news augurs well for the real estate sector that has also witnessed the passage of the real estate regulation bill and REIT. With inflation under control and an expected normal monsoon this year, the industry looks forward to a continued accommodative stance by the RBI, he added.

Meanwhile, the rate cut failed to cheer Indian stock markets, with the benchmark Sensex falling 379 points by 1.40 PM on Tuesday. This was in the backdrop of other Asian markets slipping in early trade, pressured by losses on Wall Street against a backdrop of slumping crude oil prices and mixed messages on the outlook for US monetary policy.

"The rate cut is likely to help lower borrowing costs and support growth further in 2016. It is expected that this benefit will be completely transferred to the borrowers, which will result in lower lending rates thus helping to revive housing sales," said Anshuman Magazine, Chairman & MD, property consultant CBRE South Asia Pvt. Ltd.  

The macroeconomic fundamentals face RBI enough leeway to reduce rates. Inflation, both wholesale and retail, have been on a steady decline in recent months. Consumer price index (CPI) inflation for the latest period i.e. February 2016 came in at a three month low of 5.18 per cent, closer to the RBI target of 5 per cent by the first quarter of fiscal 2017, with the moderation in the prices of food items. Further, the deflation in the Wholesale Price Index (WPI) entered its 16th month in February 2016, helped by the decline in global oil prices. This has provided additional comfort for the RBI.