RBI Cuts Key Interest Rate Week Before Election, Loans Set To Get Cheaper

The Reserve Bank of India (RBI) on Thursday cut its key interest rate by 25 basis points or 0.25 per cent to 6 per cent, in a widely expected move to propel the economy. Announcing a back-to-back cut in the repo rate just a week before the national election, the RBI's monetary policy committee also maintained its neutral stance on the trajectory of interest rates going ahead. A neutral stance enables the central bank to move either way on the key rates.

Repo rate is the key interest rate at which the RBI lends short-term funds to commercial banks. Four out of the six members of the Monetary Policy Committee voted in favour of a 25 basis points cut in repo rate, while the other two voted to keep the rate unchanged. 

More than 85 per cent of the nearly 70 economists polled by news agency Reuters had expected the central bank to cut the benchmark lending rate by 25 basis points to 6.00 per cent today.

The central bank projected GDP growth at 7.2 per cent for financial year 2019-20, according to its first policy statement of financial year 2019-20. The RBI said it expects economic growth to be in the range of 6.8-7.1 per cent in the first half of the current financial year, and in the range of 7.3-7.4 per cent in the second half with "risks evenly balanced".

Inflation is likely to remain benign in the short term, it noted. Assuming a normal monsoon in 2019, the RBI lowered its CPI inflation projection to 2.4 per cent in the fourth quarter of 2018-19.

For the first half of the current financial year, which began on April 1, the central bank expects inflation at 2.9-3.0 per cent, and 3.5-3.8 per cent in the second half.

Thursday's rate cut - the second this year - means commercial banks will have more room to pass on the benefit of lower lending rates to loan borrowers. At the same time it would also translate into a lower interest rate earned by depositors.

Since the last policy review in February, the commercial banks have lowered their MCLRs (marginal cost of funds-based lending rates) marginally, but more needs to be done, RBI Governor Shaktikanta Das told reporters in a press conference. “There has to be appropriate and effective transmission of rates," he said.

Economists welcomed the move on the lending rates while maintaining status quo on policy stance. 

"I'm happy to see the RBI is not toeing the market line because markets were expecting a much more dovish tone… We need to watch out how the monsoon pans out," said Indranil Pan, chief economist, IDFC First Bank. (Also read: Here's what experts say)

The latest policy statement comes after the first bi-monthly review meeting of financial year 2019-20 by the Monetary Policy Committee which began on April 2.

India's growth in GDP or gross domestic product slowed to 6.6 per cent in the October-December period, its slowest pace recorded since the quarter ended September 2017.

Consumer inflation - gauged by the Consumer Price Index (CPI) - picked up to 2.57 per cent in February from the 19-month low of 1.97 per cent the previous month.

The RBI has set a medium-term goal of 4 per cent for consumer inflation, which it tracks primarily to formulate its policy.