Indo-Asian News Service, New Delhi, Jan 15: Monthly installments on home, auto and consumer durable loans may finally come down, as the apex bank in a surprise move cut key lending rates.
The unscheduled rate cut served early Thursday morning led Indian Inc. to cheer the move and stock markets to rally.
The industry which is reeling under an economic slowdown coupled with high fuel and interest rate costs said that it expected more such moves in the coming month to kick-start the investments and the buying cycle.
The much awaited reduction in lending rates also fulfilled Reserve Bank of India (RBI) Raghuram Rajan’s promise of an ‘out-of-turn’ rate cut as and when inflation eases.
Thursday move which came as a surprise broke away from the standard RBI practice of announcing the lending rates every two months in a financial year.
The announcement, though anticipated, was expected to be made at the next monetary policy review meeting scheduled for Feb 3. Now, the industry is clamouring for more rate cut in the Feb 3 meeting.
The move, triggered by recent inflation data that met apex bank’s target of a below- eight-percent retail inflation by January 2015, led it to reduce the repo rate or the rate at which RBI lends to commercial banks by 25 basis points.
In a statement, Rajan said: “In its public interactions, the RBI had committed to initiate the process of monetary easing as soon as data indicated that medium term inflationary targets would be met.”
According to him, lower-than-expected inflation has been enabled by the sharper- than-expected decline in prices of vegetables and fruits since September, ebbing price pressures in respect of cereals, and the large fall in international commodity prices, particularly that of crude oil.
Only a day earlier, data on India’s wholesale price index (WPI) based inflation showed a decline of 0.11 percent in December 2014 from 6.40 percent year-on-year.
Retail inflation too fell to a low of five percent in December from 9.87 percent during the corresponding month of 2013.
After the surprise move, equity markets, especially interest sensitive stocks, zoomed. Bonds and rupee too surged drastically.
The barometer index of Indian equities markets closed the day’s trade 728.73 points or 2.66 percent up with all the sector-based indices ending with healthy gains.
Interest-sensitive sectors like banking, auto, capital goods, realty, oil and gas, fast moving consumer goods (FMCG) and consumer durables sectors rallied.
Finance ministry welcomed RBI’s move stating that it would help in providing a fillip to the economy by increasing the private sector’s ability to spend, as well as, indirectly improving the balance sheet of the corporate sector and banks.
Lauding the RBI’s move, Federation of Indian Chambers of Commerce and Industry’s (FICCI) president Jyotsna Suri pointed out that the cost of finance was an important factor for giving boost to the industrial sector, which had been under stress for some time now.
“This measure will help in improving the investor sentiment. FICCI hopes that this will be the beginning of further cuts in the policy rate by the central bank, and will enable its transmission into lower lending rates by the banks,” Suri said.
Commenting on the policy announcement, Confederation of Indian Industry (CII) director general Chandrajit Banerjee said the rate cut would propel investment demand, spur spending in rate-sensitive consumer durables and give a fillip to construction activity.
“Going forward, CII hopes that while maintaining a delicate balance between growth and inflation, the RBI would shift its stance in favour of growth, given that the trend in inflation is clearly subdued,” Banerjee said.
The Associated Chambers of Commerce and Industry of India (Assocham) also applauded the RBI decision and observed that the move has correctly assessed the industry’s need.
“The RBI view that any further cut in rate would depend upon further moderation of food inflation and current account deficit is well acknowledged. This move will bring cheer for industry, economy as whole and for the common man,” said Rana Kapoor, Assocham president.
