Why the RBI is fussing over transmission & rigidity of base rate


India's central bank Wednesday cut its repo rate by 25 basis points to a seven-year low of 6 percent.

The six member monetary policy committee (MPC), headed by new RBI governor Urjit Patel, were of the view that the moderation in price trends have persisted long enough to warrant lower loan costs, necessary to engineer a quick industrial turnaround and goad people to spend more.

That's well below the RBI's 4 percent target and its projection of 2.0-3.5 per cent in April-September, sparking pressure from the government and others to cut rates by 50 bps on Wednesday or signal another 25 bps easing later this year. The central bank, however, remains fixated on inflation as it believes that even now there are upside risks for inflation than downside risks for growth.

Food prices have been coming down, bringing inflation rates in India to new lows in recent months. According to HDFC Bank MD Aditya Puri, there is always a case for rate cuts. Banks received a rap on the knuckles for the unsatisfactory cuts in MCLR and rigidity in base rate, which the RBI proposes to scrutinise further. A rate cut at this moment will boost these sentiments further where footfalls and conversions are bound to increase.

Between January 2015 and May 2017, the weighted average lending rates (WALR) on fresh loans (captures the incremental change in loan rates) have fallen by about 160 bps, as against the 175 bps cut in repo rate.

Developers feel that the rate cut to 6% was on expected lines given the low inflation levels in the economy. Inflation is at its lowest in five years and economic growth is picking up. One-third of the economists polled that the RBI could cut its repo rate by 25 basis points.

Consumers can expect home and auto loans to get cheaper as Reserve Bank of India snipped the repo rate the first time this financial year. The roll-out of the Goods and Services Tax has been smooth and the monsoon normal.

Giving us a better understanding on the way this rate cut will affect the automotive industry was Abdul Majeed, Partner Price Waterhouse said, "The RBIs 25 basis points cut in the report rate is a good move". "The prudent approach of the central bank in reacting to incoming data in a calibrated manner will reinforce confidence amongst global investors", ICICI Bank CEO Chanda Kochhar said. "If there is no demand for loan, it's mostly unlikely for the bank to slash rates", he said.