The Reserve Bank of India (RBI) surprised markets with a 25 basis point cut in interest rates on Thursday, its first reduction since May 2013. Banks are expected to follow suit, leading to cheaper loans for autos and homes and so lower EMIs.
Public sector bank United Bank of India has announced that it will cut its base rate by 25 basis points to 10 per cent from February 1. Its bigger rivals have also signalled their intention to lower lending rates. Keki Mistry, vice chairman & CEO of HDFC, said banks have room to lower lending rates but may wait for a while before passing on the benefit to borrowers.
With the inflation outlook remaining benign due to the fall in oil prices, analysts see more room for the RBI to lower rates. Atsi Sheth, senior vice president at Moody's Sovereign Risk Group, said the RBI rate cut signals that the central bank is confident of hitting its retail inflation target of 6 per cent.
Mr Mistry of HDFC sees the Reserve Bank of India lowering rates by around 1 per cent this year.
The Reserve Bank has signalled its intention to lower rates further but also linked it to the government's commitment to lowering the fiscal deficit. "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 crude oil. Crude prices, barring geo-political shocks, are expected to remain low over the year, the RBI said in a statement. "Key to further easing are data that confirm continuing disinflationary pressures. Also critical would be sustained high quality fiscal consolidation as well as steps to overcome supply constraints and assure availability of key inputs such as power, land, minerals and infrastructure"
The first full-year budget of the Narendra Modi government is expected to be presented next month. Gautam Chhaochharia, head of India Research of UBS Securities, said that the sharp fall in global oil prices, which are down 60 per cent since June, will give room to the government to stick to fiscal consolidation measures.
Many banks have lowered their deposit rates which will help them pass on the RBI rate cuts to the borrowers, said P Srinivas, MD, of United Bank of India. A lower deposit rate helps banks lower their borrowing cost.
Country's largest lender State Bank of India said that it is evaluating rate decision after the RBI move. But more importantly the rate cut is a signal from the RBI to banks to lower rates, said B Sriram, MD of SBI..