In the past, even when the RBI has signalled lower rates, this rate transmission never really happened because banks always found a way to ignore the central bank's policy cues.
Shares of automobile companies were trading higher by up to 5 per cent on the National Stock Exchange (NSE), after the Monetary Policy Committee (MPC) of Reserve Bank of India (RBI) in its sixth bi-monthly monetary policy meeting on Thursday cut the repo rate by 25 bps to 6.25 per cent from 6.50 per cent, earlier.
India's last rate cut, to 6.00%, was in August 2017. However, all the members agreed on changing the policy stance to neutral.
The biggest take away from the policy on Thursday is that this marks the beginning of a fresh rate cut cycle after a prolonged period of rate pause and the MPC wants the markets to understand that.
He said the rate cut is in the right direction, given that the inflation footprint has been benign for some time. In the third quarter of 2019-'20, the rate is estimated at 3.9%, Das said. Policymakers predict inflation will rise this year but remain within the RBI's target range.
"The 25 bps reduction in repo rate taken together with the shift in RBI's stance from "calibrated tightening" to a "neutral approach", would go a long way in lifting sentiment among businesses", CII President Rakesh Bharti Mittal said.
Speculations were there that the six-member MPC, headed by RBI Governor Shaktikanta Das, will announce repo rate cut to ease pressure on banks.
The central bank also cut its estimates on headline inflation, which cooled off to an 18-month low of 2.2 percent in December, for the next year.
The central bank pegged the growth in Gross Domestic Product at 7.4% in 2019-'20. The Financial Sector regulator, also says the Country's economic growth forecast at 6.3%, largely supported by public investments, credit growth and improved agricultural output is feasible. "The need is to strengthen private investment activity and buttress private consumption".