In line with our expectation of a non-unanimous rate cut, the vote to reduce the repo rate to 6.0% from 6.25% was taken by a margin of 4-2.
According to Patel, banks have been selective in rate cuts in aggressive segments like home and auto loans and new lending, but other segments, where borrowers are still tied to the base rate, leave much to be desired. In the previous meeting of the MPC in June, the policy rate was left unchanged at 6.25%. Only when their stressed balance sheets are cleaned up, can they lower their lending rates to stimulate more capital expenditures by corporates and reverse the slump in industrial production.
The European Central Bank is also seen as potentially easing up on its bond purchases.
This is the sixth bi-monthly policy review by RBI's Monetary Policy Committee. Repo rate is the rate at which RBI lends to its banks. "RBI move is indeed a good move at the right time", said Manoj Paliwal, CFO, Omkar Realtors & Developers.
In fact, even before the rate cut from the MPC, the banking industry has already signaled a downward trend on interest rates with market leader State Bank of India slashing the savings bank interest rate by half a percentage point.
Vehicle loans are now available at an average of 11 per cent interest and while we wait to find out by how much this rate is likely to go down by, the auto industry is definitely looking forward to a possible rate cut.
The rate cut is the RBI's first since one of the same size in October and a show of confidence in a country that has experienced a surge in foreign investments into debt and shares this year.
Describing the rate action as expected, Icra said at the current level repo rate, it doesn't expect the monetary policy stance to be revised to be accommodative from neutral, unless the baseline inflation projection for 6-12 months ahead eases below 4 per cent, which looks unlikely and thus reducing likelihood of further rate cuts this year.
Finance Minister Arun Jaitley in June called for a reduction in the rate following a sharp fall in inflation in the world's fastest-growing major economy.
Under the earlier base rate regime (for borrowers before April 2016), changes in lending rates happened slowly, making it hard for lenders to transmit RBI's rate cuts.
The next day the Bank's chief economist, Andy Haldane, said he favoured increasing the cost of borrowing later this year.
"With the real estate sector coming under the regulatory umbrella, new project launches may involve extended gestations and, along with the anticipated consolidation in the sector, may restrain growth, with spillovers to construction and ancillary activities".
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