MUMBAI -- After a 10-month pause, the Reserve Bank on Wednesday cut benchmark lending rate by 0.25 per cent to over 6-year low citing reduction in inflation risk, a move that will lower interest on home, auto and corporate loans.
The repo rate, at which RBI lends to banks, is now down to 6 per cent, the lowest in more than six-and-a-half years.
The reverse repo, at which RBI borrows from banks, has been readjusted accordingly by similar percentage point to 5.75 per cent. The marginal standing facility (MSF) rate and the Bank Rate have also come down to 6.25 per cent.
RBI had last cut the key lending rate by 0.25 per cent in October 2016 monetary policy, Urjit Patel's first as RBI Governor. That was also the first monetary policy which was decided by Monetary Policy Committee (MPC).
"The decision of the MPC is consistent with a neutral stance of monetary policy in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 per cent within a band of +/- 2 per cent, while supporting growth," Patel said after the third monetary policy review of the current fiscal by the 6-member MPC.
Despite a cut in the benchmark lending rate, RBI retained its GDP forecast to 7.3 per cent.
Appreciating RBI's decision to cut interest rate, Economic Affairs Secretary Subhash Chandra Garg said it is an important step to sustain growth and moderate inflation.
"We welcome the 25 basis points cut in the repo rate as an important step necessary to converge toward the appropriate real monetary conditions for sustained growth consistent with India's potential and for stable, moderate inflation," he said.
However, the stock market, which had largely factored in the cut, declined. While the BSE index Sensex slipped from record high to end 98.43 points lower at 32,476.74, NSE's Nifty fell 33.15 points to 10,081.50.
On the rate of price rise, Patel said: "The MPC observed that while inflation has fallen to a historic low, a conclusive segregation of transitory and structural factors driving the disinflation is still elusive."
Noting that the trajectory of inflation in the baseline projection is expected to rise from current lows, he said the MPC decided to keep the policy stance neutral and to watch incoming data.
The MPC remains focused on its commitment to keep headline inflation close to 4 per cent on a durable basis, he added.
It has also stressed on an urgent need to reinvigorate private investments, clear infrastructure bottlenecks and provide a major thrust to the Pradhan Mantri Awas Yojana for affordable housing.
RBI said it is working in close coordination with the government to resolve large stressed corporate borrowings and recapitalise public sector banks.
The banking sector in India is reeling under Rs 8 lakh crore of non performing assets (NPAs) or bad loans, of which PSU banks alone account for over Rs 6 lakh crore.
Patel noted that the MPC will continue monitoring movements in inflation to ascertain if recent soft readings are transient or if a more durable disinflation is underway.
"In its assessment of real activity, the MPC noted that while the outlook for agriculture appears robust, underlying growth impulses in industry and services are weakening, given corporate deleveraging and the retrenchment of investment demand," he said.
He further said that there is a scope for banks to cut rates further, especially for those sectors which have not benefited in the past rate cuts.
RBI also said that it is not fully satisfied with the MCLR system and is studying that can move to a market-linked benchmark.
Four MPC members -- RBI Governor, Deputy Governor Viral V Acharya, Chetan Ghate and Pami Dua were in favour of the monetary policy decision.
However, another member Ravindra H Dholakia voted for a policy rate reduction of 50 basis points, while RBI executive director Michael Debabrata Patra voted for status quo.
Commenting on RBI policy action, HDFC Chairman Deepak Parekh said: "I think it is a good move to the economy. I think it was expected and the MPC has taken a right decision."