The Monetary Policy Committee (MPC), led by Reserve Bank of India Governor Urjit Patel, chose to cut the repo rate, or key lending rate, by 25 basis points to a seven-year low of 6 per cent on Wednesday. Ratings firm Crisil said, "Despite a rate cut, the MPC s policy stance has been kept neutral given the expected uptick in inflation".
Monetary Policy Committee of Reserve Bank of India met for its 3rd bi-monthly policy review today. The Committee was formed during a year ago on the lines of Federal Open Market Committee in the US. The home loan borrowers should, therefore, get the advantage of lower EMI's as the bank's cost of funds, as reflected by its MCLR - Marginal Cost of Lending Rate will also be expected to come down. The repo rate is the rate at which banks borrow from the central bank. "I think, we need a time-bound, single window clearance by state governments of this very important initiative, which has the potential for growth", said Patel.
The monetary policy committee "will continue monitoring movements in inflation to ascertain if recent soft readings are transient or if a more durable disinflation is underway", the RBI said. "Consumer inflation eased to its slowest pace in more than five years to 1.5 per cent in June".
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Following the decision, the benchmark repo rate stands reduced to 6 percent from 6.25 percent earlier. The amalgamation of lower interest rates coupled with various progressive measures taken by the government will hopefully help buyers ahead of the festive season. "This reinforces my view of room for incremental rate cuts to the tune of 50-75 bps in coming months", said Rana Kapoor, MD & CEO, Yes Bank. But the real estate industry is going through awful times.
The rate cut was in line with market expectations.
The central bank has refrained from raising its benchmark interest rate and kept it steady at 4.75 per cent since October of past year as rapid inflows of foreign capitals have eased concern of risks of the US Fed's reserve tight policy. On one hand there is an acknowledgment that private sector investments are lacking and on the other hand the solution in the form of 0.25% rate cut do not wholeheartedly address the burning issue of anaemic private investments.