NEW DELHI: Reserve Bank of India (RBI) governor Raghuram Rajan cut the repo rate by 25 basis points to 6.50%. The repo rate is the rate at which RBI lends to banks. This also means that RBI has kept the window open for a further rate cut.
The RBI, however, kept the cash reserve ratio unchanged at 4 per cent. The cash reserve ratio (CRR) is the amount of funds that banks are required to park with RBI. If the central bank decides to increase the CRR, the available amount with the banks comes down.
The RBI resorts to the CRR tool to drain out excess money from the system. However, banks have not traditionally passed on the benefits of RBI rate cuts to retail customers. Then tend to use repo rate cuts to solve their structural problems.
For example, last year the RBI cut the repo rate by 1.25 percentage points but the banks reduced rates only by 0.70 percentage points. It is evident that Rajan is wary of a bad monsoon and the impact of the seventh Pay Commission. Both could fuel inflation. However, RBI expects that the Seventh Pay Commission impact will be less compared to the fifth Pay Commission.
But this time three variables ensure that consumers will get the benefit of lower equated monthly instalments (EMIs) on their loans: 1. The marginal cost of the funds-based lending rate (MCLR) ensures that if short-term deposit rates fall bank lending rates will be lowered in a more efficient manner. 2. Secondly, the recent interest rate cut in small saving schemes 3. Thirdly, lower inflation, which is now at 5.18 per cent.
Hence, RBI in its bimonthly monetary policy on Tuesday cut rates and hopefully banks will pass on a substantial part of it to customers.