In its second surprise cut within two months, RBI today slashed benchmark interest rate by 0.25 per
cent, which is likely to soon result in lower EMIs on home, auto and other loans as also in cheaper credit for corporates.
The rate cut from 7.75 per cent to 7.50 per cent, prompted by inflation remaining low, comes within days of Finance Minister Arun Jaitley announcing in the Union Budget that the government was committed to fiscal consolidation.
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RBI Governor Raghuram Rajan said he expects banks to pass on the benefit of cheaper credit in the new next few weeks to borrowers.
"My hope is that over the span of the next few weeks, as
we move into the new fiscal, we will see more transmission into lower interest rate," Rajan said.
Welcoming the RBI move, Minister of State for Finance, Jayant Sinha said that EMIs should come down significantly and the rate cut will provide near term boost to the economy.
He also said there is room for further cuts going forward. A number of economists anticipated further easing of rates by 50-100 basis points in 2015.
The Indian Banks' Association Chairman T M Bhasin said the rate cut would "accentuate banks to review their base rates".
SBI chairperson Arundhati Bhattacharya said the bank will take an "appropriate call" on its lending rates soon. While RBI cut rate by 25 basis points on January 15 as well, only a few banks passed it on to borrowers.
The industry chambers too hoped that the banks would pass on the rate cut benefits to the borrowers. The cut incidentally came on a day when over Rs 80,000-crore spectrum auction, as well as second round of coal auction, began with aggressive bidding by corporates.
The early morning rate cut announcement, which follows
the government mandating RBI for 'inflation targeting', sent the benchmark BSE Sensex soaring to the historic 30,000-mark in opening trade but profit booking brought down the markets later in the day.
Chief Economic Adviser Arvind Subramanian said growth will pick up in the coming months, inflation is on downward trend, and government's fiscal consolidation is well on target.
Rajan said: "The process of transmission is somewhat asymmetric. Banks tend to be a little faster in raising rates rather than cutting rates. I have no doubt that the pressure of the two rate cuts over time will feed into lower rates."
The central bank is also examining if there are any institutional constraints in passing on these interest rate cuts, he added.
