MUMBAI: In an attempt to give impetus to the Indian economy that has been lumbering along for quite some time now, the Reserve Bank of India (RBI) on Thursday tried to bring down the rate at which you borrow from banks. To do so, the central bank cut its key policy rates for the third time in a row, bringing it to its lowest level since September 2010. The Monetary Policy Committee’s decision to cut the rate at which the RBI lends to banks by 0.25 per cent, bringing it down to 5.75 per cent, was unanimous.
“Our decision is driven by growth concerns and inflation, in that order,” RBI Governor Shaktikanta Das said. There were indications of further RBI rates cuts. Experts believe that there could be at least one or even two more policy rate cuts this calendar year provided inflation stays low. “Growth impulses have weakened significantly as reflected in a further widening of the output gap compared to the April 2019 policy,” the central bank said.
If done, the Monetary Policy Committee's unanimous decision will make borrowing cheaper and prompt consumers to borrow and spend on homes, cars or consumer durables.
The idea is to offer cheaper home and automobile loans to spur consumption and boost the industry. Till now, businesses had been chary of investing in a market where consumer demand is weak. For example, the automobile sector is struggling. The central bank hopes its intervention will push demand.The housing market that has been flat at best could perk up if home loan rates are cut. With banks getting cheaper funds, the rates for various small saving schemes could get a haircut, said Anil Gupta, vice president, ICRA.
But does the RBI rate cut quickly translate into banks lowering their lending rates? Normally it takes four to six months for lenders to pass on the benefit, but the 0.50 per cent cut in RBI rates since February have already resulted in 0.21 per cent pass on for fresh loans, Das revealed. Crisil expects banks to pass on 0.10 to 0.20 per cent of the fresh rate cut to borrowers. Economists expect the monetary policy to be complemented by the fiscal policy new Finance Minister Nirmala Sitharaman will unveil in her first budget.