Rate reduction by RBI – Will it reduce the EMIs?
In a move that surprised the corporate world, investors, consumers, brokers, analysts and a host of other observers, the Reserve Bank of India today morning – 4th March – announced a reduction in the benchmark repo rate by 25 basis points to bring it down to 7.5%. The reverse repo dropped to 6.5%. The CRR is the same at 4%. This is definitely a surprise because, just yesterday Mr. Rajan had said that he would not be in a position to reduce the interest rates quickly since inflation is still high.
So this rate cut is actually half-hearted. As stated by Mr.Rajan, there are significant growth concerns that are still observed. In the month of January 2015, it was only the fertilisers and the steel sectors that showed some growth out of the eight core sectors. In all other sectors, growth actually dropped. For example, natural gas showed a 6.6% drop (3.5% in December 2014), Electricity dropped to 2.7% (3.7% in Dec 2014), Cement 0.5% (3.8% in Dec 2014). Coal fell to 1.7%.
But will this rate cut help in regaining the lost momentum? No one can be sure. The sentiment has surely get a boost, but how much will it improve the situation on the ground needs to be seen. Sensex crossed the 30000 mark following this announcement.
The reasons mentioned by the RBI Governor for the rate cut are as below:
- Expected fiscal consolidation by the government following announcements made in the budget 2015.
- There would a shift towards increasing the spends on infrastructure and cutting down on subsidies
- Higher share to States out of the tax pool
- A memorandum signed between the government and the RBI to work in a complementary fashion and also to set clear inflation targets for RBI. For 2017, the target set is 4%.
As far as the home loan EMIs are concerned, while the print and the electronic media has gone to town cheering reduction in EMIs, if the ground realities are anything to go by, a large majority of lending institutions may not still pass on any significant benefits to their existing customers. The new customers however could benefit and this could lead to a additional load of balance transfers happening in the market.
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Sitaraman is an expert in Risk Management with over 23 years of experience in the lending industry. He has written a thought provoking book, a thriller fiction - The Whistleblowers (Published by Westland Ltd.). The book gives inside insights to a layman on how Risk Management works in a lending organisation and also helps the reader to the right things while putting all his / her savings in buying a property. Click here for more details of the book – The Whistleblowers.