Mumbai: The Reserve Bank of India on Thursday cut benchmark interest rate by 0.25 per cent to 6.25 per cent on expectation of inflation staying within its target range, a move that may translate into lower monthly installments for home and other loans if the banks pass it on to consumers.
Public sector banks led by the State Bank of India are usually the first ones to pass on the benefit to the consumers, with private lenders following suit.
A fall in repo rate is most likely to have an impact on both the existing and future borrowers. To begin with, the bank you are associated with might reduce the Marginal Cost-based Lending Rates (MCLR). The fall in the Marginal Cost-based Lending Rate will cause the EMI on your loan to go down.
The change in the repo rate is likely to result in decrease in the interest to be paid on a loan irrespective of whether it is a car loan, personal loan or home loan. This is because the repo rate is the rate at which all the banks borrow money from the Reserve Bank of India. Any change in these rates usually tend to have a direct impact on the interest to be paid by the customers.
The central bank also changed its monetary policy stance to 'neutral' from the earlier 'calibrated tightening', signalling further softening on its approach towards interest rates.
In the first policy review under Governor Shaktikanta Das, the six-member Monetary Policy Committee voted 4:2 in favour of the rate cut, while the decision to change policy stance was unanimous.
The RBI cut its estimates on headline inflation which cooled off to a 18-month low of 2.2 per cent in December for the next year, and expects the number to come at 2.8 per cent in March quarter, 3.2-3.4 per cent in first half of next fiscal and 3.9 per cent in third quarter of FY20.
Benchmark interest rate was cut by 0.25 per cent to 6.25 per cent, a move that would result in lower cost of borrowing for the banks that are expected to transmit the same to individuals and corporates.
"Headline inflation is projected to remain soft in the near term, reflecting the current low level of inflation and the benign food inflation outlook, the MPC resolution said, adding "we need to be watchful of vegetable prices, oil prices, trade tensions, health and education inflation, financial market volatility and monsoon outcomes".
The rate cut is in consonance of achieving the medium term objective of maintaining inflation at the 4 per cent level while supporting growth, it said.
Deputy Governor Viral Acharya and another MPC member, Chetan Ghate, voted for status quo in interest rates, while Das and three others voted for a cut in interest rates.
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