India announces fifth interest rate cut, loans to be cheaper

It also said that some RBI watchers expect a larger cut this week after the central bank cut the repo rate by an unconventional 35 bps to 5.40% in August

The repo rate or the rate at which RBI lends to banks has been revised to 5.15 per cent from 5.40 per cent.

For new borrowers, this will mean lesser EMIs and better interest rates on new loans as banks are mandated to link all new floating rate loans to any of the four external benchmarks specified by the RBI in order to make the passing on of the RBI's rate cuts to the borrower faster. A repo rate cut allows banks to reduce interest rates for consumers and lowers equal monthly instalments on home loans, vehicle loans and personal loans.

With the global economic activity weakening further since the last RBI credit policy in August 2019, the apex bank stated that heightened uncertainty emanating from trade and geopolitical tensions continues to cloud the outlook.

The RBI also cut its real gross domestic product (GDP) growth forecast for 2019/20 to 6.1 percent from a prior projection of 6.9 percent, citing forward-looking surveys that indicate persistently weak demand conditions will persist. All six MPC members voted in favor of a rate cut and for retaining the accommodative stance, the statement said. Chetan Ghate, Pami Dua, Michael Debabrata Patra, Bibhu Prasad Kanungo and Shaktikanta Das voted to reduce the repo rate by 25 basis points.

The RBI's repo rate is now at its lowest levels since March 2010, when it stood at 5%, following the global financial crisis. The recent measures include the steepest cut in corporate tax, the rollback of enhanced surcharge on Foreign Portfolio Investors, and more to jump-start growth which hit a six-year low of 5% during the first quarter of the current fiscal. International Monetary Fund too lowered India growth rate to 7 per cent by 30 bps. Fourth, an RBI rate cut should help to meet the immediate challenge of funding Rs 1.45 trillion (0.7 per cent of GDP) corporate tax rate cut, without stoking yields. A repo rate cut allows banks to reduce interest rates for consumers and lowers equal monthly instalments on home loans, vehicle loans and personal loans.

Since the last bi-monthly meeting, the CPI inflation stayed below the RBI's median target of 4 per cent for a long time and averaged sub-3 per cent in the last one year, reflecting softer core and food inflation.

While rate cut is nearly certain, the quantum of cut and the policy stance will be keenly watched by the market participants.

And markets expect further easing after Friday's reduction, with the RBI seen delivering another 15-basis point cut at its December policy, before an extended pause, according to a Reuters poll conducted before the policy review.

The central bank said the decisions are in consonance with its medium-term target of 4 per cent for consumer inflation.

Despite the surge in the onion prices, the headline inflation for August had come at 3.8 per cent leading to expectations of a rate cut.

On the regulation and supervision front, the RBI chose to increase the household limits for micro-lenders' borrowers, and also raise the cap to Rs 1.25 lakh per eligible borrower from the previous Rs 1 lakh.

"We expect 25-40 bps more cuts in this fiscal", he said.

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