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


This was the first monetary policy review for the former economic affairs secretary, who took over as RBI Governor in the second week of December 2018.

The government was believed to be unhappy with the RBI over a number of issues, including its apparent reluctance to cut rates to stimulate the economy.

The Reserve Bank of India (RBI) on Thursday unexpectedly lowered interest rates and, as anticipated, changed its policy stance to "neutral" to boost a slowing economy after a sharp slide in the inflation rate.

Expect home and auto loan EMIs to become cheaper by say Rs 300-400 per month if not by Rs 600-700, which needs a more charitable 50 bps repo rate cut. The RBI also revised down headline inflation estimates to 2.8 per cent in March quarter, 3.2-3.4 per cent in first half of next fiscal and 3.9 per cent in Q3 of FY20. It also stayed below RBI's inflation target of 4 per cent for five consecutive months. "Going by the guidance, there is room for a further rate cut".

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. The decision "restores growth maximization as a secondary objective of the RBI".

RBI Governor Shaktikanta Das said, "we are constantly & continuously monitoring the liquidity situation and based on the requirement we will ensure that there is no liquidity scarcity".

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The six-member MPC, headed by Reserve Bank of India Governor Shaktikanta Das, began its meeting on Tuesday and announced its decision on Thursday.

The repo rate is the rate at which the Reserve Bank lends short-term money to the banks, while the reverse repo rate is the rate at which the central bank borrows money from commercial banks. That seems to be Das' priority too.

"Headline inflation is projected to remain soft in the near term reflecting the current low level of inflation and the benign food inflation outlook", the statement said, but cautioned that beyond the near term, some uncertainties warrant careful monitoring such as volatile vegetable prices, crude oil prices and trade tensions.

Das, a career bureaucrat, was appointed shortly after Patel resigned as governor amid a heated public battle with the state, which led to questions about the central bank's independence from politics. "The need is to strengthen private investment activity and buttress private consumption".

The MPC also noted that "after exhibiting an uptick in the festive month of October, industrial activity, measured by the index of industrial production (IIP), slowed down in November".