Home loans, car loan, and personal loans are set to get tighter as the Reserve Bank of India on Thursday decided to cut its benchmark repo rate by 25 basis points (bps) to 6% to keep prices under check and to support growth.
The rate cut, the second announced by the central bank in 2019, was expected by economists and the markets. It is observed to indicate a falling rate environment.
The monetary policy committee (MPC) has also lowered growth projections and maintained the neutral monetary policy position.
The change in repo rate, the rate at which the central bank gives money to commercial banks, will quickly lead to lower interest rates on fresh bank loans.
Existing borrowers on floating rate will, however, have to wait for the reset clause to kick in. For example, if you have a January reset clause on your loan, the rate cut will have no immediate impact. If you are a depositor, you can expect a fall in your fixed deposit rate.
The MPC voted 4:2 in favor of the repo rate cut. MPC members Chetan Ghate and Viral V. Acharya voted to keep the policy rate unchanged. Only Ravindra H. Dholakia voted to change the position from neutral to accommodative while rest of the MPC members voted in favor of the decision to maintain the neutral stance of monetary policy.
In 2018, the central bank had raised rates by 50 bps to 6.5% which is 2019 has been cut and the repo rate is back at 6%.
Inflation, growth, and liquidity
The RBI also changed downwards the CPI inflation to 2.4 percent for the fourth quarter of 2018-19 and between 2.9-3.0 percent in the first half of 2019-20. It also projected the CPI inflation rates at being between 3.5-3.8 percent in the second half of 2019-20.
The inflation rates for the first half of 2019-20 have been revised keeping in consideration the reduced food inflation during January-February, the fall in fuel inflation, increase in international crude oil prices, inflation expectations of households and assuming a normal monsoon in 2019.
The RBI announced that the inflation levels rose to 2.6 percent in February 2019 from 2 percent in January.
It stated that the inflation levels were expected to increase from 2.6 percent in February 2019 to 4.2 percent in the fourth quarter of 2019-20.
The RBI also said that the headline CPI inflation level is expected to rise from its recent lows with the effects of a favorable base dissipating. But it said that it would remain below the target of 4 percent.
“Higher crude oil prices, volatility in international financial markets, the risk of a sudden reversal in the prices of perishable food items, and fiscal slippages are, however, upside risks to the inflation trajectory,” the RBI said.
As far as the downside risks of the inflation trajectory are concerned, the RBI listed softer crude oil and commodity prices on the back of a sharper slowdown in global growth, and the persistence of low food inflation pose.
The RBI also lowered its projection for GDP growth as well and brought it down to 7.2 percent from 7.4 percent as was projected in the February monetary policy.
“Now GDP growth for 2019-20 is projected at 7.2% in the range of 6.8-7.1 percent in the first quarter of 2019-20 and 7.3-7.4 the second half,” the RBI said.
It said that since the February policy was announced, there had been some signs of domestic investment activity weakening as was reflected in a slowdown in production and imports of capital goods.
“The moderation of growth in the global economy might impact India’s exports. Taking into consideration, higher financial flows to the commercial sector, resilience in private consumption, increase in disposable incomes of households due to tax benefits and optimistic business expectations, growth projection has been lower,” it said.