Home, auto loans to become cheaper as RBI cuts rate by 0.25 per cent

Home, auto and other loans are set to become cheaper with RBI today reducing the short-term lending rate by 0.25 per cent to over 5-year low of 6.5 per cent, taking the total cut to 1.5 per cent since January last year. Unveiling the first bi-monthly monetary policy for the current fiscal, RBI Governor Raghuram Rajan said banks have already cut interest rates by 0.25-0.5 per cent and after today’s rate cut borrowings will become cheaper further.

“Borrowing is cheaper...and will continue to do so,” the Governor said, adding that the introduction of marginal cost of funds-based lending rate (MCLR) system will improve monetary policy transmission. The Reserve Bank has effected a rate cut after a gap of 6 months. The last policy rate cut, of 0.50 per cent, was done in September 2015. RBI had last pegged the repo rate at 6.50 per cent in January 2011.

RBI has also introduced a host of measures to smoothen liquidity supply so that banks can lend to productive sectors, while indicating an accommodative stance going ahead. Given weak private investment in the face of low capacity utilisation, a reduction in the policy rate by 0.25 per cent will help strengthen growth, he said.

The cut was broadly in line with expectations. However, the stock market reacted negatively and the BSE index, Sensex, was down over 400 points. Rajan also took a host of measures on the liquidity front, starting with the narrowing of the policy rate corridor to 0.50 per cent from the earlier 1 percentage point, which resulted in the reverse repo rate - at which banks can park excess funds with the RBI - being reset at 6 per cent.

The policy said the average overnight borrowings by banks have increased to Rs 1,935 billion in March from Rs 1,345 billion in January. With regard to new bank licences, Rajan said RBI will explore the possibilities of licensing other differentiated banks such as custodian banks and banks concentrating on wholesale and long-term financing.