Loan rates might get cheaper as the Reserve Bank of India cut interest rates by 50 basis points as inflation has come down despite poor monsoons.
The benchmark repo (repurchase rate) now stands at 6.75 per cent from 7.25 per cent earlier. Economists had widely expected the central bank to cut rates by 25 basis points since consumer price inflation fell to a record low of 3.66 per cent in August and the US federal reserve kept its interest rate unchanged. Another of RBI’s precondition for the rate cut – that banks pass on the rate cuts to customers – had also been met to some extent.
After the RBI announcement, the SBI, too, cut the benchmark lending rate by 0.4 per cent to 9.3 per cent.
In its statement, the central banks said that “the focus of monetary action for the near term will shift to working with the Government to ensure that impediments to banks passing on the bulk of the cumulative 125 basis points cut in the policy rate are removed.”
Simply put, it wants banks to pass on more of these rate cuts to customers.
While inflation is expected to rebound in the coming months, the central bank expects CPI rise at 5.8 per cent in January, a shade lower than its August projection. At the same time, however, it has also pared its gross domestic product growth estimates to 7.4 per cent from 7.6 per cent earlier as “underlying economic activity… remains weak on account of the sustained decline in exports, rainfall deficiency and weaker than expected momentum in industrial production and investment activity.”
The RBI’s target inflation rate is 6 per cent by January 2016 and the central bank wants to reduce inflation to 4 per cent over the coming couple of years.
The RBI also announced some measures to increase flow of funds to Indian markets. It said that the limits for foreign portfolio investment in debt securities will be announced in rupee terms.
The investment limit in central government securities will be increased in phases to 5 per cent of the outstanding stock by March 2018. This, according to RBI, will open up room for additional investment of 1,200 billion in the limit for central government securities by March 2018 over and above the existing limit of 1,535 billion for all government securities For the rest of this financial year, the bank has decided to increase the investment limit in two tranches from October 12, 2015 and January 1, 2016. In each tranche, the investment limit increase would be: Rs 130 billion for central government securities and Rs.35 billion for state development loans.
Secondly, the central bank said it would permit Indian corporates that are eligible to raise external commercial borrowings (ECB) to issue rupee bonds – known popularly as Tandoori bonds – in overseas markets with a minimum maturity of five years within the ceiling of foreign investment permitted in corporate debt (US$ 51 billion at present).