SBI leads cut, with 40bps

Mr. Rohit Gadia, Founder & CEO, CapitalVia Global Research Limited said, RBI surprisingly cut repo rate by 50bps, a rate cut by 25bps was expected. “The proposal to reduce the risk weights on low-priced housing loans will incentivise the banks“, said Arundhati Bhattacharya, chairperson, SBI. Raghuram Rajan has done his bit by releasing the brakes on the economy. This marks the fourth repo rate cut by the RBI since January 2015.

“Investment is likely to respond more strongly if there is more certainty about the extent of monetary stimulus in the pipeline, even if transmission is slow”, he said. The focus should now shift to bringing inflation to around 5 per cent by March 2017, he said, adding that RBI will be vigilant for signs of monetary policy adjustments that are needed to stick to the “deflationary path”.

Still, it is unusual for the RBI to lower interest rates in September, as it has tended to be on the defensive against food price pressures during the monsoon season running from mid-June through September, after enduring several years of weak rains. The policy interest rate is now at a four-and-a-half year low of 6.75 per cent. With consumer price index linked inflation running at a record low of 3.6 per cent – way below the January 2016 target of six per cent – and commodity prices across the world, especially crude, still in a free fall, the room for further correction continues to be vast.

But analysts see other reasons for this rate cut.

Repo rate cut to 6.75%, Reverse repo cut to 5.75%.

The governor has made controlling inflation a priority during his tenure and with retail inflation easing to 3.66 per cent in August against 7.03 per cent a year ago, he said the time was right for a further cut.

Other conditions also aligned to warrant the bank’s “front-loaded policy action”, Rajan said, despite investors’ surprise at the move. Because of decline in inflation and the actions taken by the government and the RBI, real interest rate had moved to a level where savers were bringing money into the banking system.

In his policy statement, RBI Governor Raghuram Rajan slammed banks for not lowering lending rates to the desired extent.

A few economists, however, think the central bank is done cutting rates, at least for now. “Clearly, interest rates will come down, base rates will come down”.