Loan rates might get cheaper as the Reserve Bank of India cut interest repo rates by 25 basis points for the third time this year because of falling inflation and slow economic growth. The bank, however, warned that below normal monsoons, which has been forecast by the IMD, rising crude oil prices and a volatile external environment remain as risks to inflation in the days ahead.
The benchmark repo (repurchase rate) now stands at 7.25% from 7.50% earlier. This was widely expected since consumer price inflation had fallen to 4.87% in April.
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- Government expects RBI to cut rate amid slowdown
- RBI slashes repo rate by 25 basis points; Urjit Patel says GST helped inflation to fall: Top developments
The RBI’s target inflation rate is 6% by January 2016 and the central bank wants to reduce inflation to 4% over the coming couple of years.
At the same time, however, economic growth is not picking up fast. While the GDP growth for the March quarter came in at 7.5%, the growth for the whole financial year was 7.3% falling short of the Central Statistics Office’s advance estimates. Moreover, core sector output shrunk by 0.4% in April while the Index of Industrial Production (IIP) rose only 2.1% in March, the slowest in five months.
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However, the central bank has also to weigh the need to boost growth against potential inflationary forces which are building up.
“A conservative strategy would be to wait, especially for more certainty on both the monsoon out turn as well as the effects of government responses if it turns out to be weak,” said the central bank it a statement.
“With still weak investment and the need to reduce supply constraints over the medium term to stay on the proposed disinflationary path (to 4 per cent in early 2018), however, a more appropriate stance is to front-load a rate cut today and then wait for data that clarify uncertainty. Meanwhile banks should pass through the sequence of rate cuts into lending rates.”