In a pre-Diwali festival bonanza to home, auto and corporate loans borrowers, new RBI Governor Urjit Patel-led panel in its debut policy review on Tuesday surprised the markets by 0.25 per cent rate cut, lowering borrowing cost to 6-year low.
In independent India’s first collective interest rate setting decision, the 6-member Monetary Policy Committee, which has three members nominated by the government and the rest from the Reserve Bank, lowered repo rate to 6.25 per cent from 6.50 per cent.
Enthused by the rate cut, Finance Ministry said it will help in achieving 8 per cent growth and expressed confidence that banks will effectively pass on the benefits to borrowers.
Bankers on their part promised to act swiftly to ensure monetary policy transmission, a move that will benefit existing and prospective borrowers.
First in six months, today’s cut came amidst big clamour for easing rates especially after the departure of former Governor Raghuram Rajan, who was often accused by some sections, including those from the ruling BJP, of stifling growth by keeping rates too high.
The repo rate, at which RBI lends to banks, was 6.25 per cent in November 2010. It peaked to 8.5 per cent in October 2011.
Giving rationale for the rate cut in the fourth bi-monthly monetary policy review for 2016-17, Patel said: “The Government has announced several measures to cool food inflation pressures, especially with regard to pulses. These measures should help in moderating the momentum of food inflation in the months ahead. This has opened up space for policy action.”
Following the rate cut, the BSE benchmark Sensex closed 91 points up at 28,334.55.
Finance Secretary Ashok Lavasa said the RBI policy will boost liquidity in the system and the central bank as well as the government are in sync with the inflation target.
“On the whole, this is a decision which will go down well with all sections of the economy,” Lavasa said.
“Welcome rate cut by RBI. Expect Banks to follow it up with effective transmission of rates. Rate cut net positive for economy,” Economic Affairs Secretary Shaktikanta Das tweeted.