MPC makes the cut
By cutting the repo rate on Tuesday by 25 basis points, thus lowering the Reserve Bank of India's key lending rate to a six-year-low of 6.25 per cent, RBI governor Urjit Patel, in his maiden monetary policy outlook as chief of the apex bank post-establishment of the Monetary Policy Committee (MPC), has sent across a clear message that the central bank prefers to boost sentiments and reinvigorate growth impulses, especially in the infrastructure, construction and manufacturing sectors.
Since January 2015, the RBI has cut the repo rate by 175 basis points, but banks have passed less than half of the central bank's rate cut to their customers. Repo rate is rate at which RBI lends to the banks. The best part of the MPC meet was the unanimity among members with regard to a repo rate cut. Experts say the interest rate cut should change the rate scenario for FY’17 as it would help support the economy’s investment demand and uptick in credit environment. For, they explain, cost of capital has to be more competitive to drive investments.
Businesses want quick revival in growth. A moderate interest rate regime will lead to an uptick in interest-sensitive sectors. On the whole, it is believed that the RBI intervention to reduce interest rates, in combination with liquidity supporting measures, would enable banks to transmit the cut to borrowers and thereby support the growth cycle. Banks now follow marginal cost-based lending rate (MCLR) mechanism for pricing new floating-rate loans. This regime came into effect on April 1 this year.
Banks previously used to price their loans according to their base rates. Customers with home loans linked to base rates can shift to MCLR rates for a fee. The base rate is expected to trend lower in view of RBI's rate cut. According to an RBI release, the committee expects that the government measures to curb inflation, especially in checking the prices of pulses, will moderate the momentum of food inflation, which has ‘opened up space for policy action, as indicated in the third bi-monthly monetary policy statement’.