The Reserve Bank of India cut the rate at which it lends to banks by 0.5 percentage points to 6.75%, a larger reduction than economists had expected.
Asked whether he had been overly aggressive with such a rate cut, Rajan said this cut was only necessitated by the room the central bank had.
In the fourth bi-monthly monetary policy review yesterday, Governor Raghuram Rajan cut interest rate by 0.50 per cent, leading to a rush of base ret revisions by banks, led by State Bank of India.
Yes Bank has also trimmed its base rate by 25 bps to 10.25 per cent with the revised rate being effective October 5.
The move to cut the base rate by SBI, which will come into effect from October 5, 2015, is expected to prompt other lenders to soften their lending rates in the coming days.
In a BSE filing BoB said it has decided “to reduce base rate by 25 basis points from 9.90 percent per annum to 9.65 percent“.
“Median base lending rates of banks have fallen by only about 30 basis points, despite extremely easy liquidity conditions“, the governor said.
Raghuram Rajan has been under pressure from the Finance Ministry, as well as the industry, to cut the interest rate, to spur economic recovery and thus mitigate the impact of slowing China on India.
UCO Bank lowered its base rate by 25 bps to 9.7 per cent. Oriental Bank of Commerce slashed its rate by 20 bps to 9.7 per cent.
At the same time the central bank cut its economic growth forecast to only 7.4 per cent in the fiscal year ending in March 2016, lower than its previous 7.6 per cent projection. “Bank deposit rates have, however, been reduced significantly, suggesting further transmission is possible”. As RBI on Tuesday reduced repo rate by 50 basis points, the slide in global commodity prices, particularly crude petroleum, have provided much needed relief to the policymakers through a lower subsidy bill as well as benign inflation. “We are looking forward now to the transmission of these cuts which will effectively help to boost confidence and investment”.
The RBI said that the rate cut is a front-loaded policy action, as greater certainty about the monetary stimulus in the pipeline would result in a stronger response on the investment front.