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#3 Key Takeaways From RBI Monetary Policy 25 basis points cut in benchmark repo rate will make MSME loans cheaper

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The Reserve Bank of India (RBI) on Friday cut the benchmark repo rate by 25 basis points (bps) to 5.15 per cent in its fourth bi-monthly policy review, keeping its accommodative stance unchanged. This is a fifth consecutive cut this year, aggregating to 135 bps.

Accordingly, the central bank has adjusted the reverse repo rate to 4.9% and bank rate at 4.4%. Here are three major takeaways from the October monetary policy document:

  • The apex bank has slashed the GDP growth forecast by 80 bps to 6.1 per cent for 201920 from the earlier 6.9 per cent. GDP growth projection has consistently decreased between February and October from 7.4 per cent to 6.1 per cent. GDP growth rate fell to 6-year low at 5 per cent in the first quarter of the current financial year.
  • Manufacturing firms in the September 2019 Industrial Outlook Survey (IOS) expected an increase in the cost of raw materials and muted selling prices in Q3 2019-20.
  • RBI's consumer confidence survey for September shows weak consumer sentiment.

MSME loans to get cheaper

RBI had mandated banks to link new floating rate personal, retail and MSME loans to an external benchmark like repo-rate, 3- and 6-month treasury bills or any other benchmark published by the Financial Benchmarks India, beginning October 1. Most banks have chosen to link their interest rates to repo rate benchmark, however no bank has put out detailed structure of MSME loans.

Rate cut of 25 basis points in the October policy review is set to make loans cheaper. "Today's rate cut of 25bps now adds up to 135 basis points rate cut in 2019 which is a very healthy figure. Retail investors may feel the benefit this time better than before due to the RBI ruling of external benchmark linked home loan rates which came into effect from 1-Oct. PSU banks are plying for higher for loan disbursements and fund new businesses which is a positive sign for the economy," says Gupta, Co-Founder and CEO TradingBells.

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