Loans could become cheaper as India's central bank cuts keys rates

Mumbai, March 4: Housing, auto and commercial loans could become cheaper with the Reserve Bank of India cutting key lending rates by 25 basis points in an unexpected move on Wednesday as it expected inflation to soften further, sending stock indices soaring during the bulk of the day. Getting some positive cues from the tiol budget tabled last week, and sensing an sustained economic recovery, the repurchase (repo) rate has been cut to 7.5 percent from 7.75 percent and the reverse repo rate has been adjusted to 6.5 percent from 6.75 percent.

The cuts follow a far-reaching agreement between the government and the Reserve Bank of India (RBI) on Monday, under which the central bank will aim to bring the country’s retail inflation below the 6-percent mark by January 2016 and to around 4 percent by the end of 2016-17.

The repo rate is the interest commercial banks pay for borrowing money from the central bank to meet short-term fund needs. The reverse repurchase rate is the interest central banks pays on short-term funds parked with it. A cut makes borrowing money cheaper for commercial banks.

The announcement, which came just ahead of the opening bell for stock markets, brought much cheer to sentiments, prompting the sensitive index (Sensex) of the Bombay Stock Exchange to open nearly 345 points higher, over the previous close at 29,593.73 points.

The key index soon breached the 30,000-point mark to touch a historic high of 30,024.74 points.

The situation was similar at the tiol Stock Exchange, where the Nifty also hit an all-time high. But both indices came under a major spell of profit-taking during the last one hour of trading and ended in the red, losing between 0.72 and 0.82 percent as per provisiol data. For the 30-share Sensex, it means an intra-day fluctuation of some 735 points.

Industry, too, welcomed the rate cuts, the second such downward revision in two months, even as some commerial banks, led by the largest private sector lendwer, the State Bank of India (SBI), indicated that they could pass on the rate cuts to their customers. The fince ministry laued the decision and said it was a vote of confidence on the steps taken by the government on fiscal consolidation and would lower the cost of loans for people at large. “More rate cuts will depend on future data,” Minister of State for Fince Jayant Sinha said.

“To summarise, softer readings on inflation are expected to come in through the first half of 2015-16 before firming up to below 6 percent in the second half,” Reserve Bank of Governor Raghuram G. Rajan said in a statement. (IANS)