Mumbai | In its second surprise rate cut within two months, RBI today slashed benchmark interest rates by 0.25 per cent, a move that may bring down EMIs for home, auto and other loans and give a boost to the economy.
The RBI’s decision to cut its policy or repo rate to 7.5 per cent — after another cut from 8 per cent to 7.75 per cent on January 15 — is also expected to lower the cost of capital for the companies and give a fillip to the investment climate.
The move, prompted by inflation remaining low, comes within days of Finance Minister Arun Jaitley announcing in the Union Budget that the government was committed to fiscal consolidation.
RBI Governor Raghuram Rajan said the rate cut was prompted by softening inflation and fiscal deficit reduction roadmap unveiled by Jaitley in his Budget on Saturday.
Softer readings on inflation are expected to come in through the first half of 2015-16 before firming up to below 6 per cent in the second half. The fiscal consolidation programme, while delayed, may compensate in quality, especially if state governments are cooperative, he said.
The early morning rate cut announcement send the benchmark BSE Sensex soaring to the historic 30,000-mark in opening trade.
A number of bankers and economists said that RBI may further cut the rates by 50-75 basis points during 2015, including a cut during the RBI’s scheduled policy review meeting next month on April 7.
The last two cuts — including the one announced today and the previous one on January 15 — have been outside the regular policy reviews.
Welcoming RBI’s decision, Minister of State for Finance Jayant Sinha said it should bring down the loan EMIs significantly and there is room for further easing of rates.
SBI chairperson Arundhati Bhattacharya said the bank will take an appropriate call on its lending rates soon.
The Indian Banks’ Association chairman T M Bhasin said the rate cut would accentuate banks to review their base rates.
The industry chambers too hoped that the banks would pass on the rate cut benefits to the borrowers.
Sinha said inflationary expectations have collapsed and a global trend of deflation is prevalent.
We have said in Parliament that we are pursuing a very prudent fiscal consolidation road map. Our aim is to move growth onto a sustainable, non-inflationary path… We are in a situation where we see EMIs (Equated Monthly Installments for loan repayments) coming down, he said.
Chief Economic Adviser Arvind Subramanian also said that the rate cut by RBI is a welcome step and good for the economy.
Government and RBI share views on economic outlook, he said, adding that the move shows that Budget is conducive for non-inflationary growth.
Commenting on RBI’s decision Revenue Secretary Shaktikanta Das said it augurs well for business and will prompt people to go in for housing and consumer loans which will boost demand and growth.
In the policy statement, Governor Rajan however expressed concern over government’s decision to postpone the fiscal consolidation programme by a year.
In the short run, however, the postponement of fiscal consolidation to the 3 per cent target by one year will add to aggregate demand. At a time of accelerating economic recovery, this is, prima facie, a source for concern from the standpoint of aggregate demand management, especially with large borrowings intended for public sector enterprises, he said.
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