Life in Gurgaon

RBI makes surprise cut in interest rate, home loans could get cheaper

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The Reserve Bank of India’s monetary policy committee on Thursday reduced the policy interest rate by 25 basis points to 6.25 %, a move that could lead to banks reducing lending rates for consumer and home loans.

At the committee’s meeting, the first after Shaktikanta Das took over as the central bank’s Governor, also changed its stance to ‘neutral’ from the earlier ‘calibrated tightening’.

The RBI policy is a very dovish one and signals further rate cuts. Inflation estimates have been revised very sharply lower by the central bank, according to a Livemint report.

The six-member monetary policy committee voted 4:2 in favor of the rate cut, while the decision to change the policy stance was unanimous. Deputy Governor Viral Acharya and another MPC member, Chetan Ghate, voted for status quo in interest rates, while Shaktikanta Das and three others voted for a cut in interest rates.

The monetary policy committee said the rate cut is in consonance of achieving the medium-term objective of maintaining inflation at the 4 percent level while supporting growth.

“Investment activity is recovering but supported mainly by public spending on infrastructure,” news agency Reuters reported quoting the MPC. “The need is to strengthen private investment activity and buttress private consumption.”

The Indian financial markets gave up some gains while 10-year bond yields slid 5 basis points after the surprise rate cut. The rupee weakened to 71.69 to the dollar immediately after the announcement but did strengthen to 71.42 soon.

The last rate cut by the RBI, to 6.00 percent, was in August 2017.

The central bank’s surprise cut in interest rate could work well with the Narendra Modi government at the Centre which wants to boost growth in an election year.

The BJP led national alliance is already in poll mode and announced several sops at its interim budget on February 1. Finance Minister Piyush Goyal rolled out the government’s last budget ahead of this year’s national elections, announcing no tax on income up to Rs 5 lakh, a Rs 75,000 crore assured income scheme for small farmers and a mega pension scheme for workers in the unorganized sector.