RBI INTEREST RATE CUT CAN BE A BOOST UP

On Tuesday, RBI surprised the whole India by cutting the interest rates. Today we are providing you a closer look to understand rate cut of RBI and what is the response of the banks after this. We really hope that you will like this post.

In a big boost for the MARKETS and economy, RBI governor Raghuram Rajan cut repo rate by 50 basis points to 6.75%. The repo rate now stands at a 4 1/2 year low.  

The reason for the cut can be:

"The modest pick-up in the growth momentum in the first half of 2015-¬16 benefited from soft commodity prices, disinflation, comfortable liquidity conditions, some Dec-logging of stalled projects, and higher capital expenditure by the central government. Underlying economic activity, however, remains weak on account of the sustained decline in exports, rainfall deficiency and weaker than expected momentum in industrial production and investment activity." Thus, the Reserve Bank Governor has been under pressure from the Finance Ministry as well as the industry to cut interest rate to spur economic recovery and mitigate the impact of slowing China on India.

Banks’ Response to Rate Cut

The market leader, State Bank of India announced a sharp reduction of 40 basis point in base rate to 9.30% which is the lowest rate offered among Indian banks. State-run lenders Punjab National Bank, Bank of Baroda and Oriental Bank of Commerce have trimmed their base or minimum lending rates by up to 0.40 per cent in response to RBI's policy rate cut. 

Punjab National Bank (PNB) cut the base rate by 0.40 per cent, Bank of Baroda (BoB) by 0.25 per cent, while Oriental Bank of Commerce (OBC) slashed the rate by 0.20 per cent.

Axis Bank to reduced base rate by 35 basis points to 9.50% in response to RBI's move to aggressively lower policy rates.  UCO Bank also reduce base rate to 9.70%, down 20 bps. Bank of India and Andhra Bank had also reduced their base rates by 0.25 per cent to 9.70 per cent and 9.75 per cent, respectively

Following other lenders, IDBI Bank also cut its base rate by 0.25 per cent to 9.75 per cent.

Note: Base rate is rate charged to best rated customers and it is also the floor rate below which banks do not lend. 

Possible Impact of the Cut in Interest rates

The central bank’s rate cut is expected to give more elbow room for the banks to cut lending rates in the festive season, which is likely to spur demand in the economy.  The reduction in interest rate is expected to positively encourage loan growth, both in the retail consumer segment, as also revitalise fixed capital formation through higher corporate sector lending, thereby supporting the growth impulses in the economy.

What the RBI Governor take on policy cut?

Question:   When the RBI cuts rates, banks are not cutting the rates proportionately; when RBI hikes rates, banks are in a hurry to hike rates. What will the RBI do in this regard? 

Answer: Over a period of time banks will have to pass on the policy cut to customers. I have no doubt that banks have to pass it on to the customers. Government and the RBI are working together for that to happen. Common man is always benefited by a rate cut. Banks cut rates by 30 basis points and new loans have come down by 45 basis points. If you have a floating rate loan, you would have been benefited. One area we are looking at is how banks are calculating the base rate and urging them to move to a calculation which is closer to the policy rate and we will be coming with more regulations in this regard. However, liquidity is not a reason to not pass it on to customers.

Question:  How do you plan to start the investment cycle? 

Answer. Lowering interest rates is to increase demand and the other way to increase demand is to cut prices. Both have to work together to increase demand. Once demand increases, it consumes more capacity. So entrepreneurs will increase their capacity utilisation. Once demand starts people will be eager to invest. Little more demand, will prompt people to invest more. Once they are eager to invest they create a demand of its own. Industry has to participate and the Prime Minister made a call to industry to invest. This is the season investment will pick up. Given the fact that inflation environment is better we are more comfortable to cut rates.