RBI Cuts Rates By 25 Basis Points

By Kavya Balaji | February 11, 2019

The RBI has cut rates for the first time since August 2017. What does this mean for you as a borrower and investor? Find out.

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The Reserve Bank of India (RBI) has decided to cut the repo rate by 25 basis points. Now the repo rate stands at 6.25%. Now, what is repo rate? Repo rate is the rate at which our Central Bank lends to commercial banks in the country. When this rate is reduced, banks will cut their lending as well as deposit rates.

Why have the rates been cut? The RBI policy statement says “these decisions are in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 per cent within a band of +/- 2 per cent, while supporting growth.” In other words, to maintain inflation at the right levels and promote the growth of the economy, RBI has cut interest rates.

What’s more? A BofA Merrill Lynch Global Research report says “we see another 25 basis point cut on April 4 to support growth.”

What does this mean for you?

As a borrower, this means your loan rates will go down, especially those of Home Loans. Yay! Banks like State Bank of India and Bank of Maharashtra have already cut rates by 5 basis points.

But fixed-rate loans do not change (unless it is fixed for a certain period). On the other hand, floating loan rates change along with the rates in the country. This is why you should opt for floating-rate loans when interest rates are falling. Note that many loans including Home Loans and Personal Loans come with floating rates. So, choose your loan carefully.

While this is good news for borrowers, it is bad news for investors, especially those who’ve invested in fixed-income securities such as bank Fixed Deposits. When banks reduce lending rates, they also reduce their deposit rates. Argh! But BankBazaar still has Fixed Deposits that will earn you 8% per annum. Isn’t that wonderful? Now, let’s find out more about the RBI rate cut.

Additional Reading: What Exactly Does The RBI Do?

What are the experts saying?

Check out what the industry experts are saying about the latest rate cut by RBI.

Adhil Shetty, CEO, BankBazaar.com

This is great news for borrowers, especially those who are planning to invest in real estate. With the budget scrapping tax from notional rent on second self-occupied property and enabling the capital gains to be invested in two houses instead of one, the interest in the real estate has already gone up. This additional rate cut will further sweeten the deal. A 25bps rate cut on a 20-year home loan of Rs. 40 L at 8.85% will bring down the interest payable from Rs. 45.4 L to Rs. 43.9 L at 8.6%. That is a savings of Rs. 1.5 L over the tenor of the loan.

B Prasanna – Head Global Markets Group, ICICI Bank

The Monetary Policy Committee (MPC) delivered a dovish policy, both in rate action and in stance, while sounding sanguine on low inflation expectations. The sharp lowering of inflation forecasts could enable further policy easing in April. In a significant departure from previous commentaries, there was an emphasis on the need to support growth if inflation objectives are achieved and the MPC noted that the slack in the economy is rising.

The RBI has also introduced some welcome regulatory changes. The list includes withdrawal of concentration limits in corporate bonds that will promote participation of Foreign Portfolio Investors, rationalisation of interest rate derivatives guidelines which will boost depth and liquidity of derivative markets, and the task force on offshore rupee markets that will foster greater participation in Indian assets. The change in risk-weighting of rated exposure to NBFCs will help strong NBFCs to get credit, thereby easing some of the strain being felt currently.

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Murthy Nagarajan, Head-Fixed Income, Tata Asset Management

RBI in its monetary policy cut the repo and reverse repo rates by 25 basis points. The repo rate now stands at 6.25% and reverse repo rates at 6%. The reason for reducing the repo rates is due to CPI inflation being revised downwards by 60 basis points. Consumer Price Inflation for the current quarter is expected to be 2.8%, the first half of the next financial year is expected to be 3.2 – 3.4% and the third quarter of next financial year is expected to be 3.9%. As per RBI, CPI inflation going forward is expected to be lower due to excess supply conditions prevailing for several food Items, lower crude prices, lower electricity prices. RBI’s survey of household and producer inflation is reflecting significant moderation in inflation expectations. They also expect the inflation’s pick up in health and education to be a one-off phenomenon. The Monetary Policy Committee noted the output gap has opened up moderately as actual output has inched lower than potential. This necessitates the need to strengthen private investment activity and increase private consumption. The GDP growth for the next financial year is projected at 7.4 with risk evenly balanced.

The focus of the union budget is tilted towards consumption which increases the chance of CPI inflation to go up. Given that the combined borrowing of central, state and PSU is around 8 % of GDP, we don’t expect repo rate cuts to be shallow. We expect one more rate cut in the April policy, as CPI inflation near term should be lower due to lower food and crude prices. This should bring the real rate which is the difference between RBI forecast of CPI inflation (3.9%) and repo rates (6%) to around 200 basis points. Going forward, we expect the short and medium term rates to come down by 25 to 35 basis points and the long end rates to be range bound due to supply pressures . The new 10-year is expected to be in the range of 7.20 – 7.50%  in the coming months. The corporate bonds spread is expected to widen due to risk aversion and  continuous supply of papers

Puneet Pal, Deputy Head-Fixed Income, DHFL Pramerica Mutual Fund

The MPC has delivered a dovish 25 bps rate cut today, lowering the benchmark repo rate to 6.25% from 6.50%. The decision to cut rates today was a bit of a surprise in terms of the timing. The MPC has reduced its inflation target by 60 bps for H1:2019-20 to 3.2-3.4% from 3.8-4.2% earlier. The CPI projection for Q3 2019-20 is at 3.9%.

The MPC has taken cognisance of the slowdown in Domestic and Global growth outlook and the continuing benign inflation outlook. The tone of the policy is distinctly dovish and we pencil in another rate cut in the next policy meeting in April 2019.

We expect the sovereign yield curve to steepen as today’s rate cut and expectations of a further rate cut will support the short end (1 – 4 yr) of the curve, while the Bond Demand/Supply dynamics are likely to deteriorate going ahead, negating a big move down in Long-Term Yields.

We expect the credit spreads to remain elevated as the current risk aversion continues to persist over the next 3-4 months.

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Shishir Baijal, Chairman and Managing Director, Knight Frank India – The reduction in repo and reverse repo rates by the RBI by 25 BPS is a welcome move, which we hope will provide a further fillip to the demand side for real estate. As a result of this reduction, we hope that banks will pass on the benefits of the revised rates to the end consumer of loans, thereby making it easier for them to make their purchase decision. For a sector which has been suffering from poor end-user demand for some time now, this is a step in the right direction.

Sameet Chavan, Chief Analyst-Technical and Derivatives, Angel Broking

The new governor came out with a surprise by granting 25bps cut in repo rate and changed the stance to neutral which was very much on expected lines. Despite this, we did not see any notable reaction from the market; in fact, markets remained subdued with a hint of profit booking towards the fag end. 

Eventually, the much awaited RBI monetary policy turned out to be a non-event. So, going ahead, we would be back to our routines and index would probably start taking cues from the global bourses. Since we are already above 11,000; we remain upbeat and expect the index to head towards 11,200 – 11,250 in the next few days. Hence, any decline up to 11,000 – 10,970 should now be construed as a buying opportunity.

Today, banking counters saw some profit booking; but, the structure remains positive, and hence, we expect buying to re-emerge in this space soon. Last few days’ movers ‘Auto’ and ‘Metal’ continues to outshine and it appears as if they are finally out of the slumber. Also, what encourages us is the participation of broader market since last couple of days. The way some of the stocks started rebounding sharply, it certainly bodes well for the momentum traders and also to improve the market breadth.

Jayant Manglik, President, Religare Broking Ltd. 

The RBI cut the repo rate by 25bps to 6.25% along expected lines. The Monetary Policy stance has also been softened to ‘neutral’ from ‘calibrated tightening’. Falling inflation and the volatile IIP growth had raised the probability of these materializing. Notably, the RBI has revised the inflation forecast also downward. In this policy, with inflation already under control, the RBI has now favoured growth, even as the concerns with respect to the fiscal deficit miss and volatile global crude oil prices continue to linger.

Additional Reading: Best Equity Mutual Funds To Buy In 2019

So, this might be the right time for you to go for those loans and stock investments. Ready?

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Category: Loans News
Kavya Balaji

About Kavya Balaji

A personal finance professional with over 10 years of experience in financial research. She believes financial literacy is important and is passionate about sharing her knowledge on the subject.

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