Mumbai: The Reserve Bank of India, in a surprise move on Wednesday, cut the repo rate by 25 basis points to 7.5 per cent, the second such cut in two months, as inflation and segments of the economy slowed. Disinflation also occurred at a pace faster than expected by the bank, triggering expectations of matching rate cuts by banks and lower EMIs for home, auto and other loans.
The move comes days after Finance Minister Arun Jaitley announcing in the Union Budget that the Centre was committed to fiscal consolidation. The cut in the rate will help in lowering interest rate for individual and corporate borrowers as well as lower cost of capital for companies and give a fillip to the investment climate.
The early morning rate cut announcement sent the benchmark BSE Sensex soaring to the historic 30,000-mark in opening trade, though it later fell to about 29,000 points.
Bankers expect lending rates to begin falling, as the RBI is set to pass through its rate cut.
Arundhati Bhattacharya, chairman of the State Bank of India, said the inflation trajectory is expected to stay benign and will aid banks in their decision making. “Our bank will take an appropriate call of a cut in base rate by looking at all evolving circumstances,” she said.
“Banks will begin reviewing their base rates and will likely cut them in April,” said M S Raghavan, chairman and managing director IDBI Bank. “Obviously, EMIs will drop. Most banks have already started reducing their deposit rates.”
“My hope is that over the span of the next few weeks, as we move in to the new fiscal, we will see more transmission into lower interest rate,” Rajan told analysts over a conference call. “The process of transmission is somewhat asymmetric. Banks tend to be a little faster in raising rates than cutting rates. I have no doubt that the pressure of the rate cuts over time will feed into lower rates,” Rajan said.
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