FEDERATION OF NATIONAL POSTAL ORGANISATIONS

Loans set to be cheaper as RBI softens stand, cuts key policy rate

HIGHLIGHTS

• Lowering of the repo rate by RBI is a signal to lenders to bring down their rates.
• The rate cut is the first by RBI since a similar cut in October 2016.
• As a result to rate cuts, home loans and other borrowings are expected to get cheaper..

MUMBAI: Home loans and other borrowings are set to get cheaper with the Reserve Bank of India's monetary policy committee (MPC) bringing down its policy rate by 25 basis points on Wednesday.

Following the announcement, the policy repo rate— the rate at which RBI lends to banks— stands reduced to 6.0%+ from 6.25%, the lowest since November 2010. Consequently, the reverse repo rate—the rate at which RBI borrows from banks stands adjusted to 5.75%.

"Recognizing that inflation is expected to rise from the current lows (1.54% in June) over the rest of the year, the MPC persevered with the neutral stance," RBI governor Urjit Patel said. "Government and RBI are working in close coordination to resolve large stressed corporate borrowers and recapitalise PSBs within the fiscal deficit target," he added.

Lowering of the repo rate by RBI+ is a signal to lenders to bring down their rates. "India's inflation has undergone a structural shift, with the emergence of 'new normal' at lower levels. 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.

The MPC's 5:1 vote in favour of a rate cut by the MPC marks a dramatic turnaround from the panel's stance in June when it voted 5:1 to keep rates on hold. While government nominee Ravindra H. Dholakia voted for a policy rate reduction of 50 basis points, RBI member Michael Debabrata Patra voted for status quo. The rate cut is the first by RBI since a similar cut in October 2016.

Patel however said that it was not yet clear whether the reduction in inflation was caused by temporary factors or a structural change. It also warned that it will continue to be vigilant in respect of inflation which was likely to rise from present levels.