The Monetary Policy Committee (MPC) which decides on interest rates for the RBI, today decided on a 25 basis cut in the repo rate, which means there will be some interest rate cuts on loans for borrowers.
Repo rates are rates at which the RBI lends money to banks in the country. It was the first time ever, that the Monetary Policy Committee (MPC) decided on interest rates, as against the earlier practice of the RBI Governor deciding on the same. The MPC, which has six members, three outsiders and three from within the RBI, decided on cutting the repo rate by 0.25 per cent for the first time since April 2016. This was also the first meeting of the MPC ever and that too under new RBI Governor Urjit Patel.
Interest rates may now fall
It was good news for borrowers, ahead of the festive season, after the committee cut interest rates. In fact, most analysts had predicted a cut in interest rates by 25 basis points, as was largely expected.
This means that interest rates on home loans, auto loans, personal loans and gold loans are likely to go down.
However, that cannot be assured as the banks must have the ability to pass on the cut to borrowers. If they do, expect some relief.
Reasons for cutting interest rates
The RBI said that the decision of the committee was largely in line with the accommodative stance. Retail inflation, has been rising from April till July and dropped to 5.05 per cent in August. There are indications that it might drop even further below the 5 per cent mark by March 2017.
How markets reacted?
Most banking stocks had rallied on Monday on hopes of an interest rate cut. However, there was some selling pressure in select banking stocks like Indusind Bank. Government banking stocks like Union Bank of India, Syndicate Bank, State Bank of India and Bank of India all rallied following the committee decision to cut interest rates.
The task of the newly appointed MPC
The role of the new MPC has been mandated to keep the inflation at a level of around 4 per cent for the next five years. However, there is a leeway of 2 per cent, also called tolerance level, that is given. What this means is that the inflation level can rise to 6 per cent and or 2 per cent.
Members of the MPC
The three members from the Reserve Bank of India are governor (Urjit Patel), deputy governor in charge of monetary policy (R. Gandhi) and an RBI-nominated executive (Michael Patra, RBI Executive Director).
The 3 members nominated by the government are esteemed academicians, Chetan Ghate, professor, India Statistical Institute, Pami Dua, director, Delhi School of Economics and Ravindra H Dholakia, professor, Indian Institute of Management (Ahmedabad). These