India may cut key interest rates, loans likely to be cheaper

N S Venkatesh

Mumbai: The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) slashed the short-term lending rate, or repo rate, by 25 basis points to 6 per cent at its third bimonthly policy review.

The six-member Monetary Policy Committee (MPC) led by governor Urjit Patel began a two-day meet on Tuesday to deliberate on the bank's stance on key rates.

This development comes against the backdrop of the government, economists and lenders pushing hard for a rate cut which the RBI has held since October past year when Urjit Patel had announced a 25 bps cut in his first policy review as RBI governor.

Following the June monetary policy decision, Chief Economic Advisor Arvind Subramanian felt the central bank had overstated the risks on inflation, noting the inflation outlook has been benign, while growth in the economy has decelerated along with slowdown in private investment, credit growth and gross capital formation. "This reinforces my view of room for incremental rate cuts to the tune of 50-75 bps in coming months", said Rana Kapoor, MD & CEO, Yes Bank.

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RBI has cut rates by 25 bps and kept its stance unchanged in the interest of maintaining a "calibrated" approach towards evolving situations. It might lead to banks reduce their lending rates, thereby, giving an impetus to credit growth, which has been down compared to a year ago.

The central bank cut the policy rate by 25 basis points to 6%, adjusting the rates on its other liquidity operations by the same amount.

The MPC has made a decision to keep the policy stance neutral and to watch incoming data with a view to keeping headline inflation close to 4 per cent. "If states choose to implement salary and allowance increases similar to the Centre in the current financial year, headline inflation could rise by an additional estimated 100 basis points above the baseline over 18-24 months", the policy statement said.

Inflation rates have slowed to record lows and food prices have been falling. The RBI last cut the rate in October.

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"The experience with the marginal cost of funds based lending rates (MCLR) system introduced in April 2016 for improving monetary transmission has not been entirely satisfactory".

The RBI is also expected to trim the reverse repo rate by an equal measure to 5.75 percent.

The central bank has previously warned that inflation could accelerate due to a seasonal rebound in food prices and factors such as planned pay hikes for government employees.

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