RBI cuts repo rate by 50 basis points, loans could get cheaper

Springing a surprise, the Reserve Bank of India (RBI) on Tuesday cut its short-term lending rate by 50 basis points, but also made a pitch for it to be passed on to end-consumers in the form of cheaper personal and commercial credit.

While the repurchase rate, or the interest charged on short-term borrowings, stands cut to 6.75 percent, it will take commercial banks to lower their own lending rates for personal, automobile, housing and commercial loans to also get reduced, translating into lower EMIs.

The indexed reverse repo rate, or the interest payable by the central bank on short-term deposit, automatically stood reduced to 5.75 percent. There was no cut in the 4 percent cash reserve ratio that banks have to maintain in the form of liquid assets and designated government securities.

Raghuram Rajan. File pic

"Markets have transmitted Reserve Bank's past policy actions via commercial paper and corporate bonds, but banks have done so only to a limited extent," Reserve Bank Governor Raghuram Rajan said in the fourth bi-monthly monetary policy statement for the current fiscal year.

"Median base lending rates of banks have fallen by only about 30 basis points, despite extremely easy liquidity conditions," the governor said.

"This is a fraction of the 75 basis points of the policy rate reduction during January-June, even after a passage of eight months since the first rate action by the Reserve Bank. Bank deposit rates have, however, been reduced significantly, suggesting that further transmission is possible."

There was pressure this time on the central bank to cut rates from all stakeholders, including a veiled nudge from government functionaries, especially since India's growth has been floundering and inflation and the pressure on the price line has been seemingly under control and declining.