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

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

Four of six MPC members voted to cut the rates, while all backed the stance change to "neutral" from "calibrated tightening".

India's central bank cut interest rates on Thursday, giving a surprise boost to Prime Minister Narendra Modi ahead of general elections due this year.

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

Owing to benign inflation numbers, the central bank changed its policy stance to neutral from calibrated tightening, adopted in October policy meet previous year under the then RBI Governor Urjit Patel.

"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", it added. The central bank also announced that the limit of collateral-free agriculture loans was being raised from Rs 1 lakh to Rs 1.6 lakh.

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"The rate cut is unlikely to give a major fillip to investments as capacity utilisation still remains low in the manufacturing sector", said Devendra Kumar Pant, chief economist, India Ratings & Research, the arm of rating agency Fitch.

Some politicians and stock market analysts said the rate cut decision may not improve Modi's chances in the election as the banks could take time to pass on rate cut benefits. This is the first policy statement issued by the RBI under its newly appointed governor Shaktikanta Das. "The need is to strengthen private investment activity and buttress private consumption", the policy said. Besides, it acknowledged domestic aggregate bank credit and overall financial flows to the commercial sector as robust, but yet to be broad-based.

Trade tensions and associated uncertainties appear to be moderating global growth, the bank said. "Secondly, in spite of soft crude oil prices and the lagged impact of the recent depreciation of the Indian rupee on net exports, slowing global demand could pose headwinds". The MPC expects inflation to ease from this point (2.8 percent for ongoing quarter; 3.2-3.4 percent for first half of next fiscal).

Inflation expectations, a broad measure of what businesses, investors and households think about how prices will change in the coming months, have softened by 80 basis points for the next three months and the 130 points in the next 12 months, according to the RBI's latest survey in December 2018.

All said, it was a refreshingly straightforward and pragmatic monetary policy review bringing in perhaps a new era of more elaborate communication from the central banks, now in India just after Fed also started press conference at every FOMC meet.

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