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