The RBI is on a rate cutting spree. Since February this year the repo rate has been cut five times and it stands now at 5.15%. This time around the Monetary Policy Committee (MPC) think-tank slashed it by a further 0.25% after the reduction of 0.40% done during August 2019.
Repo rate, also commonly known as Key Policy Rate, is the rate at which commercial banks borrow from the RBI to meet their short-term needs. Increase or reduction directly affects the deposit as well as the lending rates across lenders/housing finance institutions.
The outlook for the economy as projected by the RBI Governor is not encouraging since the GDP growth estimates was pegged down by 80 basis points, from the earlier projected 6.90% to 6.10%. This can be seen as a blow for the already sluggish-paced economy.
With the sluggishness being conspicuous the rate cut should have been ideally 0.50% rather than 0.25%. The Purchasing Managers Index or PMI fell to a 19-month low, displaying the slowdown in the consumption interest. A 50 basis point cut at this juncture, ahead of the festival season, would have offered some impetus for the consumers. Automobile, investing in new homes including home renovation, purchase of high-end consumer durables, destination holidays and such discretionary spending sectors would have benefited with a bigger rate cut.
If growth is what the government is expecting then the motivation has to come from ease of borrowing money, liquidity and low rates. Even the inflation levels have been quite under control. Despite an opportunity persisting, the central bank’s decision not to cut rate by an additional 25 basis points is confusing.
Onus on banks
The rate reduction being passed on to the borrowers is yet to happen at a fervent pace since the entire benefit always eludes home loan borrowers. Though the new benchmark for lending rates has been linked to external benchmark such as the repo rate linked lending, the percentage should be more in favour of the borrowers since the onus is on the banks to do so.
No doubt that the MPC is doing everything to keep the engine of the economy warm, but unless the rate cut benefit spurs economic growth it would be like the age-old proverb of “operation successful but patient died.”
With RBI-MPC being accommodative on the rate front more cuts are expected in the coming months. The repo rate may be cut by another 25 basis points during the next bi-monthly policy. The scenario surely benefits the real estate sector that is reeling under low demand and motivate borrowers to invest in real estate.
For borrowers, choosing repo-linked lending rate would be ideal to keep their EMI outflow lower.
