Banks must transmit repo rate cut by RBI to boost consumption, investment: India Inc

With the RBI slashing the repo rate by 35 basis points, India Inc on Wednesday said it's swift and full transmission by banks in the form of lower lending rates will be crucial to lift consumption and investment in the economy. The Reserve Bank of India's (RBI) Monetary Policy Committee on Wednesday cut the interest rate by 35 basis points -- the fourth successive reduction -- to a nine-year-low level, in an attempt to boost an economy growing at its slowest pace in nearly five years.

The central bank reduced its growth projection for the Indian economy to 6.9 per cent for the current financial year, from 7 per cent forecast in June, due to a slowdown in demand and investments. "With today's (Wednesday's) cut, the RBI has lowered the policy rate (repo) by 110 basis points in the current calendar year. The central bank has also kept liquidity in the surplus mode, and it is now critical for banks to move fast and transmit this ease in the policy rate in the form of lower lending rates.

"Unless the transmission is swift and full, we may not see a change in the consumption and investment trajectory," Ficci President Sandip Somany said. PhD Chamber of Commerce and Industry President Rajeev Talwar said the repo rate cut will help rejuvenate consumption and increase the competitiveness of the producers with the reduced cost of capital.

"However, at this juncture, the transmission of the cut in repo rate with an effective reduction in lending rates by the banking sector would be crucial to materialise the benefits at the ground level," said Talwar. "Going ahead, we expect the repo rate to come down to 5 per cent in the coming quarters for enhanced liquidity and availability of credit to the industry especially to the MSMEs (micro, small and medium enterprises) with a significant reduction in the cost of capital," he added.

The repo rate is the rate at which the RBI lends to banks. According to the Indian Chamber of Commerce, reduction in the repo rate will transmit to cheaper loans which will boost the economy at large, especially sectors such as real estate and automobiles, and spur the latent consumer demand in these segments. Higher disposable income in the hands of consumer will also fuel the growth in domestic demand going forward.

"In a scenario where there is pressure on GDP (gross domestic product) growth, the move will spur investment and boost consumption activity in the economy. We believe that this announcement might result in a further reduction in home loan rates and will provide an impetus to the government's initiative of affordable housing," Anshuman Magazine, chairman and chief executive officer (India, South East Asia, Middle East & Africa), CBRE, said.

Exporter's body EEPC India Chairman Ravi Sehgal said the central bank should also ensure easy credit disbursal to the exporters, especially in the MSME sector and transmission by the banks of the earlier reductions in the lending rates.

(This story has not been edited by Devdiscourse staff and is auto-generated from a syndicated feed.)