Interest rates on loans are set to go down further with Reserve Bank of India governor Shaktikanta Das announcing a reduction in repo rate by an unconventional 35 basis points (100bps = 1 percentage point). This comes as to spur economic activity that has slowed down in recent months, while inflation has remained under check.
Das — who announced the fourth round of rate reduction since taking charge less than eight months ago — also stepped in to encourage banks to sanction more auto and personal loans by reducing the risk weight to revive demand. Automobile sales have been falling for nine consecutive months and weak consumer sentiment is impacting other purchase decisions. Lower risk weight will result in banks having to set aside less capital for these consumer loans and make it attractive to lend, provided there is demand.
“The credit flow will now revive with today’s measures and growth will pick up,” the governor said.
State Bank of India (SBI) was the first off the block to cut its loan rates by reducing its marginal cost of lending rate (MCLR) by 15bps with effect from August 10. This brings the one-year MCLR (which is the benchmark for home loans) to 8.25%. “Following this, home loans have become cheaper by 25bps since April 10, 2019,” the country’s largest lender said. SBI’s overdraft facility will also become cheaper as it is linked to the repo.
On the downside, depositors with over Rs 1 lakh will receive lower returns on their savings account, which is linked to the repo rate.
The move came after Das nudged banks to pass on the benefits of rate cuts announced since last October. With the latest move, the repo rate stands reduced by 110bps in 2019, while banks have reduced lending rates by 29 basis points, arguing that their cost of funds do not increase immediately and the high returns on public provident fund and NSC make the task tougher. Despite a push from the central bank and the government, lenders have reduced rates by only eight basis points since June.
With RBI expecting the growth rate to slip to 6.9% this year, compared to 7% projected earlier, the governor indicated that rates will remain low, stating that its accommodative stance meant no hikes, and said that the central bank gave the highest priority to growth.
It joined central banks worldwide in easing policy by bringing repo rate down to a nine-year low of 5.4%. The RBI’s move came almost at the same time as a rate reduction by the Thai central bank and followed the Reserve Bank of New Zealand’s rate cut on Wednesday.
All six members of RBI’s Monetary Policy Committee (MPC) voted in favour of a rate cut. However, three external members voted for a 25bps cut instead of 35, which was mooted by the RBI governor in the past. Announcing the reduction, Das said, “The downward adjustment in GDP growth projection was warranted by various high-frequency indicators pointing to a weakening of both domestic and external demand conditions.” Supporting the decision to cut rates was the fact that inflation was expected to remain below 4% for the whole year.
Das said that before Wednesday, RBI’s 75bps rate cuts since February this year have been passed through to financial markets but have not translated into lending rate reductions. “The weighted average call money rate has declined 78bps, the market repo by 73bps and the 10-year government securities by 105bps. Banks, on the other hand, have reduced interest rate on their rupee loans by only 29bps,” said Das. He said that the RBI, which absorbed Rs 1.3-lakh-crore surplus liquidity in July, had banks lending Rs 2.11 lakh crore up to August 5.
He added that while banks will be driven by their risk perception, the RBI is creating an enabling situation to ensure better credit flow to non-banking finance companies (NBFCs).