RBIs GIFT

Reserve Bank of India cut repo rate by 50 basis points was surely a big surprise and the first rate cut in over 3 years. Repo rate is the rate at which RBI lends to the banks. No doubt the loans will get cheaper for those who opted for floating rate of interest.

Why did RBI go for such cut in the rates?  Growth had come down last year at 7.7 per cent in Q1 to 6.9 per cent in Q2 to 6.1 per cent in Q3 and investment had gone negative in Q2 and Q3. And look at inflation, the headline inflation had come down from 9 per cent over last two year to 7 per cent core inflation and non-food manufacturing inflation which had peaked at 8.4 per cent in November last year has come below 5 per cent for the first time in two years and the no 4.7 per cent has been closed to the recent long period average.

Also this reduction will help revive growth of credit in the economy. RBI also abolished the prepayment penalty on home loans so as to bring about uniformity and transparency in this area. It is a win-win situation for both, the borrowers and banks. Banks will see their business improve.

 But RBI has missed out one big change in this credit policy review. When there is an increase in repo rates, the banks are quick to increase the base rate, which leads to an increase in borrowing rates.  Therefore the loans are expensive from the very next day of such hike.

In this policy, reverse has happened. With cut in lending rates, banks have not reduced their rates simultaneously. Instead banks will consider the rates cut by month end. They will earn additional income equivalent to 50 basis points until such time, the rates are reduced. RBI may consider looking at this aspect for larger benefit of borrowers.

Inflation, crude prices and fiscal deficit will play a crucial role in RBIs future review policy. As such this is one of the best review policies by RBI in years.