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3rd interest rate cut by RBI in 2015

Yesterday, RBI Governor Dr. Raghuram Rajan again lowered the policy interest rates by another 0.25%...  it is the third 25 bps rate cut in calendar year 2015.

The total reduction in the policy rates, since the beginning of this year, now stands at 0.75%.

Hopefully, banks will not continue to exploit the aam small borrowers and pass on this rate reduction  entirely and quickly.

As you may recollect, prior to this, most banks have brought down the lending rates by only around 0.2% to 0.3% vis-a-vis the total drop of 0.5%. And that too after much pressure from the Govt. and Reserve Bank of India (RBI).

In its second bi-monthly monetary policy statement for the FY 2015-16 yesterday, RBI felt the need to again bring down the interest rates as
- the inflation has been within the projected levels
- impact of unseasonal rains has been moderate
- increase in administered prices has been muted
- proposed rate increase in the US is likely to be delayed
- capacity utilization in the industry has generally been low
- investment and credit growth is still subdued.

RBI has reiterated that banks too should accordingly reduce their base lending rates.

The bad news, however, is that the RBI has downgraded it growth expectations for the FY 2015-16 from 7.8% to 7.6%... with a downward bias. The many problems that are a threat to the Indian economy include
a) The monsoon is predicted to be below-normal this year
b) Crude prices have firmed up in last 1-2 months
c) Geo-political risks and threat of volatility in the external environment still persist
d) Increase in service tax (from 12.36% to 14% w.e.f. Jun 1) would impact the inflation

In other words, RBI is not too hopeful about the prospects of the growth revival in the Indian economy this year. [As such, many experts are of the opinion that the rate cut should have been much sharper, between 0.5 to 1%.]

Meanwhile, reviewing the global and Indian economic scenario over the last couple of months, RBI observed that
- Recovery in the global economy is still slow and susceptible to risks
- Global financial markets too remain extremely volatile
- Agricultural sector was affected by unseasonal rains and with forecast of a weak monsoon the risk of food inflation has gone up
- Industrial activity too is plagued by weak consumption demand, drop in sales, disappointing earnings and falling capacity utilization
- Performance of the services sector has been mixed
- Though inflation has softened to 4.87% it may increase to around 6% levels by March 2016. However, this would still be within the desired levels
- Though liquidity was comfortable in April, in May the conditions had tightened 
- While exports have shrunk, there is a spike in crude prices and gold import. This will keep both rupee and current account deficit under pressure
- Due to lower exports, the growth in Indian economy will be increasingly dependent on the domestic demand
- Unlike the buoyant foreign inflows during 2014-15, the year 2015-16 has begun with net portfolio outflows.

So, on the economic front, the Modi Govt. has to battle many challenges.

Meanwhile, let us keep our fingers crossed for banks to provide some relief to our monthly EMI burden.

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