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Loans get cheaper, with RBI cutting repo rate by 25 basis points from 6.25% to 6%

Aug 03, 2017 06:45 PM

Highlights

  • On Wednesday, the Reserve Bank of India (RBI) decides to decrease interest rates.
  • From 6.25 percent to 6 percent, repo rate drops by 25 basis points (bps).
  • From 6 percent to 5.75 percent, reverse repo rate also sees a reduction by 25 bps.

As we all know, Repo rate, the rate at which the banks receive a short-term money from the Central bank, on Wednesday, was cut by 25 basis points (bps); and is now standing at 6 percent compared to its previous 6.25 percent. Such a cut in key rates was previously formulated in October 2016. This decision by the RBI is found to be greatly aligned with the Street’s expectations. This was thought to be influenced by the decreasing deviation of the inflation target set for continual quarters.

In a survey conducted to review the decision, 40/56 economists polled by Reuters had predicted the repo rate declination by 25 basis point, while two of them predicting the cut to be at 50 basis point. The remaining remained neutral and had other permutational theories.
RBI had changed its stance from accommodative to neutral at the beginning of this year. This action item was performed with regard to the moderation in retail inflation over the past three months where extensions and changes in monetary policies were requested.

Modi’s government calling for denominations last year, on currency notes resulting in a consumer spending minimum, and low food prices have kept the inflation numbers well below the RBI’s 4 percent, which correlates to their midterm target, supporting them for the past eight months. These were the influencing factors that eased inflation rates first time in five years and now, also supporting cheaper loans.

The repo rate by the RBI, a rate at which the central bank runs transactions with the commercial banks by bowing money was also cut by 25 basis point, from a previous 6 percent to 5.75 percent.
According to Reuters poll, RBI is predicted to stick with these changes in the fiscal policies until 2019, given the forecast of an accelerated growth in the economy. With regard to this, Indian stocks are rising at record high numbers.

In response to this report, Sanjiv Bhasin, Executive VP, Market & Corporate Affairs, IIFL told timesofindia,com that the markets have already been implementing this 25 basis points cut in rates introduced by RBI. He also added to this explaining that if banks pass this on to consumers, it will happen over a period of time with further delay, as their margins are already under pressure, evident from the SBI who cutt deposit rates on savings bank accounts earlier this week. The largest lender, on Monday, cut rates of interest on saving banks account from 4 percent to 3.5 percent on a balance of Rs. 1 crore and below. With this as reference, one can well say that about 90 percent of SBI’s savings bank accounts have balances under Rs. 1 crore.
It’s likely to be a tricky situation for the banks as they would feel the pressure to pass on any rate cut; with the loan growth being usually weak, combined now, with the margins also being a matter of concern.

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