RBI rate cut set to ease EMI burden

EMIs on home loans and auto loans will edge downwards with SBI and other public sector banks cutting lending rates on Tuesday after RBI governor Raghuram Rajan announced a 0.25 per cent cut in the key repo rate for the third time this year.

More banks including leading private sector lenders are expected to follow suit. RBI reduced the repo rate, at which it extends short term loans to banks, to 7.25 per cent from 7.5 per cent earlier in order to spur demand and revive corporate investments.

Responding to the RBI move, the country's largest bank SBI reduced its lending rate by 0.15 per cent to 9.7 per cent, while Allahabad Bank and Punjab & Sind Bank cut their base rates by 0.3 per cent and 0.25 per cent respectively.

RBI, however, left untouched the cash reserve ratio (CRR) for banks at 4 per cent and Statutory Liquidity Ratio at 21.5 per cent. A reduction in the CRR by 0.5 per cent could have made an additional Rs40,000 crore available to banks for giving more loans.

While India Inc welcomed rate cut it felt the RBI could have gone for a bigger reduction and easing of CRR to inject more money into the system as inflation and the fiscal deficit are under control.

The stock markets reacted negatively with the largest fall in nearly four weeks. "We still have very weak investment. We haven't seen a strong pick-up," RBI governor Raghuram Rajan said at news conference, adding that there were factors to suggest that growth was weaker than the GDP numbers made it out to be. "In general, the corporate results have been quite weak also suggesting that final demand is yet to pick up strongly," he added.

"Going forward, room may absolutely open up if monsoon is better than expected or government action can mitigate any potential rise in food prices and if energy prices stay contained," Rajan said, vowing to "take full advantage".

Rajan said inflation still remains a worry for the central bank as it expects price rise to remain subdued till August before rising to 6 per cent by January 2016. Commenting on RBI policy action, Chief Economic Adviser Arvind Subramanian said the government and RBI agree these cuts signify that the economy needs policy support as growth is recovering while the external environment remains weak.