RBI snips interest rate another 0.25%

RBI snips interest rate another 0.25%

MUMBAI: The Reserve Bank of India promised on Thursday to nudge banks to pass on its latest rate cut to borrowers even as banks remained tentative in their response to an earlier reduction. RBI governor

Shaktikanta Das

announced his second rate cut in two months, bringing down the key repo rate to 6% from 6.25% earlier.

Markets were disappointed despite the much-anticipated rate cut because of RBI’s negative prognosis in respect of the economy. Das cut the growth forecast for FY19 from 7.4% to 7.2% citing global headwinds and a slowdown in private and public consumption. He also reduced the inflation forecast for the first half of FY20 t o 2.9-3% from 3.3% earlier.

Although the RBI governor shelved an earlier proposal to get banks to link their lending rates to an external benchmark, like the repo rate, he said he would work with banks to ensure that they passed on the current and earlier rate cuts.

“We are conscious of the fact that there has to be a more effective transmission of rates. Banks have reduced their marginal cost of lending rates by 10 basis points but more needs to be done,” said Das. With Thursday’s cut, Das has fully reversed the 50 basis point rate hike by former governor Urjit Patel in 2018.

The second rate cut by Das was also a narrow majority, with four members voting in favour and two against. RBI deputy governor Viral Acharya and MPC member Chetan Ghate voted against the rate cut.

While banks have been blaming a shortage of funds for their inability to cut rates, Das said the RBI would add to measures already announced to ensure adequate liquidity. Earlier this week, the central bank had announced a $5 billion-dollar swap with banks that will result in an improvement in rupee liquidity.

In his policy, Das said that banks would now have to maintain a lower cash buffer since a part of their investment in government securities would be reckoned as liquidity coverage ratio as prescribed by the Bank for International Settlements.

“In our view, domestic rupee liquidity could ease over the foreseeable future,” said Pranjul Bhandari, chief economist, HSBC India. She attributed her view to higher foreign capital inflows which would compel the RBI to purchase dollars and release rupee liquidity. “Second, as goods and services tax (GST) compliance strengthens after the elections, the acceleration in the currency in circulation, witnessed in 2018, can be contained. All of this could potentially improve the transmission of RBI rate cuts,” she added. Most analysts, including Bhandari, forecast an additional rate cut this year.

However, home loan providers say that they will reduce rates only after they see the cost of funds come down. “Interest rates are a function of liquidity in the system and if there is not enough liquidity, rates will tend to be high,” said Keki Mistry, vice chairman and CEO, HDFC.

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