Housing, auto and commercial loans could become cheaper with the Reserve Bank of India cutting key lending rates by 25 basis points in an unexpected move on Wednesday as it expected inflation to soften further, sending stock indices soaring during the bulk of the day.
Getting some positive cues from the national budget tabled last week, and sensing an sustained economic recovery, the repurchase (repo) rate has been cut to 7.5 percent from 7.75 percent and the reverse repo rate has been adjusted to 6.5 percent from 6.75 percent.
The cuts follow a far-reaching agreement between the government and the Reserve Bank of India (RBI) on Monday, under which the central bank will aim to bring the country's retail inflation below the 6-percent mark by January 2016 and to around 4 percent by the end of 2016-17.
The repo rate is the interest commercial banks pay for borrowing money from the central bank to meet short-term fund needs. The reverse repurchase rate is the interest central banks pays on short-term funds parked with it. A cut makes borrowing money cheaper for commercial banks.
The announcement, which came just ahead of the opening bell for stock markets, brought much cheer to sentiments, prompting the sensitive index (Sensex) of the Bombay Stock Exchange to open nearly 345 points higher, over the previous close at 29,593.73 points.
The key index soon breached the 30,000-point mark to touch a historic high of 30,024.74 points.
The situation was similar at the National Stock Exchange, where the Nifty also hit an all-time high.
But both indices came under a major spell of profit-taking during the last one hour of trading and ended in the red, losing between 0.72 and 0.82 percent as per provisional data. For the 30-share Sensex, it means an intra-day fluctuation of some 735 points.
Industry, too, welcomed the rate cuts, the second such downward revision in two months, even as some commerial banks, led by the largest private sector lendwer, the State Bank of India (SBI), indicated that they could pass on the rate cuts to their customers.
The finance ministry laued the decision and said it was a vote of confidence on the steps taken by the government on fiscal consolidation and would lower the cost of loans for people at large. "More rate cuts will depend on future data," Minister of State for Finance Jayant Sinha said.
"To summarise, softer readings on inflation are expected to come in through the first half of 2015-16 before firming up to below 6 percent in the second half," Reserve Bank of Governor Raghuram G. Rajan said in a statement.
"The fiscal consolidation programme, while delayed, may compensate in quality, especially if state governments are cooperative," said the governor who has otherwise been taking a rather conservative approach in dealing with the monetary policy, especially the interest rates.
"Given low capacity utilisation and still-weak indicators of production and credit off-take, it is appropriate for the Reserve Bank to be pre-emptive in its policy action to utilise available space for monetary accommodation."
In its monetary policy statement of Jan 15, 2015 the Reserve Bank had reduced the repo rate by 25 basis points, and said: ''Key to further easing are data that confirm continuing disinflationary pressures."
But it maintained its interest rate stance in its sixth bi-monthly monetary policy statement of Feb 3 in the absence of new developments on inflation or on the fiscal outlook, awaiting signals on that count and from the national budget.
While the next bi-monthly policy statement will be issued April 7, 2015 the still weak state of some sectors and the global trends, prompted the central bank, in its own admission, to become more anticipatory to make changes immediate in its stand.
In his statement on Wednesday, Rajan also lauded the Central Statistics Office (CSO) for the changes it made in the national income accounting, on which is based the country's gross domestic product estimation, to bring it up to international standards.
"Yet the picture it presents of a robust economy, with growth having picked up significantly over the last three years, is at odds with still-low direct measures of growth of production, credit, imports and capacity utilisation as well as anecdotal evidence on economic cycle," he said.
"Nevertheless, the picture of a steadily recovering economy appears right," he added.
"Going forward, the RBI will seek to bring the inflation rate to the mid-point of the band of 4 percent (plus or minus 2 percentage points) provided for in the agreement, that is to 4 percent by the end of a two-year period starting fiscal year 2016-17."