RBI cuts interest rate by 25 bps to 6%

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By offering a token 25 bps policy rate reduction to the rate cut lobby, Reserve Bank of India (RBI) governor Urjit Patel and his team at the Monetary Policy Committee (MPC) have effectively passed the ball to the government's court. The RBI is expected to cut repo rates by 25 basis points which could make way for cheaper loans.

"The market went through consolidation as 25 bps rate cut by RBI was on expected line but maintained the neutral stance, whereas the investor expected a change", said Vinod Nair, Head of Research, Geojit Financial Services Ltd. Considering the battery of new reforms in force, a good monsoon in progress, benign inflation numbers, favourable global environment and the overall uptick in industry sentiments a healthier lending rate could have provided the much needed thrust to fuel India's growth story. This adds further comfort for the interest rate cycle to remain in a neutral mode with an outside chance of further easing before April'18 policy.

Therefore, this repo rate affects everyone from banks and businesses to the common man and the industry at large.

The lender has forecast inflation will be four per cent or lower at the end of this year.

Acharya said the ongoing resolutions on the NPA front will also help in better transmission as the banks' balance sheet stress is resolved. The cost of funding for real estate developers should also now reduce. However, the RBI is not sure if the inflationary trends are sustainable in the long run. The stock market, on the other hand, is touching greater heights.

Avneesh Sood, Director, Eros Group: GST has been implementation and buyers' queries are increasing day by day.

The theory that rate cut can work wonders to boost the economy anyway doesn't have many takers. Most banks, however, reset them after a year.

"The rate cut is a welcome and much awaited move from the Reserve Bank of India". The actual rate of home loan interest can be equal to the MCLR or have a "markup" or "spread" but can never be lower than the MCLR. "If there is no demand for loan, it's mostly unlikely for the bank to slash rates", he said.

Meanwhile, the RBI has constituted an internal group to study the marginal cost of lending rate (MCLR) system for commercial banks created to improve monetary policy transmission, RBI Deputy Governor Viral Acharya said on Wednesday.

A shopkeeper prepares a customer's order at a market in Jakarta.

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