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02 Aug 2017

RBI cuts interest rates, loans to get cheaper

RBI's comments will show its intentions

The RBI has cut repo rate by 25 basis points to 6%, the lowest in more than 6.5 years, during its policy review today.

The fact, that retail inflation has now come down to a five-year low of 1.54% in June, brought about this revision.

Moreover, a rate cut would also facilitate cheaper loans from banks.

Here's more.

In context

RBI's comments will show its intentions


The major concern

The slump in food prices, sending the June consumer inflation to a five-year low, made the apex bank cut down its repo rate to 6%.

The main question remains is - will the panel leave room for further cuts when it finishes deliberating on the monetary policy?


The time to take action is now

In the previous bimonthly review, MPC had held onto the repo rate for the fourth time at 6.25% as, Patel said, the panel didn't want to take any "premature policy action" and needed more inflation data to initiate a cut.

However, the country's largest lender SBI went ahead on Monday and cut the interest rate on savings bank deposits by 50 basis points.

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RBI needs to act


RBI needs to act

RBI has received pressure from the government as well as industry lobby groups to lower rates. Chief Economic Adviser Subramanian said that it was clear that the consumer price index (CPI), as well as the latest Index of Industrial Production data, showed the need for a rate cut.

Industry chamber ASSOCHAM on Sunday penned a letter to RBI Governor Urjit Patel, saying the same.


Loans will be affected

Bankers are keeping a close eye on the RBI's policy stance, as this would lead to a significant change in the long-term deposit and lending rates.

A lowered repo rate would lead to businesses borrowing more from the banks. Individuals would get much cheaper rates from the bank, as the rate cut will get filtered down to them via consumer loans.

Watch out for banking stocks


Watch out for banking stocks

Certain rate-sensitive stocks will also gain from the potential rate cut. The biggest benefactors of this rate cut would be the stocks of public sector banks such as SBI, PNB and even private banks, like ICICI Bank and YES Bank.

Some other lucrative stocks would be LIC Housing Finance, Mahindra & Mahindra (M&M) and JK Tyres.

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