Auto and home loans become cheaper as RBI cuts interest rate

New Delhi: The Reserve Bank of India (RBI) on Tuesday unveiled its first bi-monthly policy review and cut its policy rates by 0.25 percent, making way for cheaper auto and home loans.

The stock market, however, was not enthused by the rate cut as sensex fell 400 points before marginally recovering lost ground.

The RBI has also announced to narrow the policy rate corridor by increasing the reverse repo rate by 25 basis points and reducing the Marginal Standing Facility (MSF) rate by 75 basis points to ensure finer alignment of the Weighted Average Call Rate (WACR) with the repo rate, however, the reverse repo rate under the Liquidity Adjustment Facility (LAF) remains adjusted to six percent while the Marginal Standing Facility (MSF) rate to seven percent.

Consequently, The RBI has decided to keep the Cash Reserve Ratio (CRR), the part of deposits which the banks are required to have in cash, unchanged at 4.0 percent.

Highlights:

• RBI Governor Raghuram Rajan had left the key interest rate stable citing growth concerns and inflation risks.
• The RBI reduced the repo rate by 1.25 percent in 2015.
• Banks had only passed on about half of the RBI's rate reductions to the borrowers so far.
• The slowdown left the economy further adrift of the government's eight percent growth target, a rate required to generate jobs for zillions of Indians joining the workforce every year.