NEW DELHI : Middle-class households burdened with debt and farmers struggling with low prices of farm produce got some relief on Thursday with the Reserve Bank of India (RBI) lowering the benchmark interest rate by 25 basis points while raising the limit of collateral-free farm loans.

The central bank’s monetary policy committee (MPC) cut the repo rate, or the interest rate at which RBI lends to banks, to 6.25%, beating analyst estimates, which suggested merely a change in stance from “calibrated tightening" to “neutral". The move could spur consumption, encourage manufacturing and boost economic growth.

RBI also said in its bimonthly monetary policy review that it will issue directions to banks to raise the limit of collateral-free farm loans from 1 lakh to 1.6 lakh. The decision was taken in view of the overall inflation situation having changed since 2010, when the present limit was set, and also the rise in agriculture input costs in the interim. “This will enhance coverage of small and marginal farmers in the formal credit system," the MPC said. Tenant farmers get collateral-free loans based on their land lease agreement.

The enhanced credit limit to farmers comes at a time when state governments have offered farm loan waivers to ease agrarian distress. Eight states have offered loan waivers worth 1.9 trillion since April 2018, Mint had reported on 21 December.

The repo rate reduction by RBI has set off expectations of banks cutting lending rates soon. “If the banks decide to go ahead and reduce interest rates, it will reduce my monthly loan payment by almost 500. It will be beneficial. In the last six to seven months, I have already had an interest rate increase," said Junaid Maqbool Bhatt, a doctor residing in Noida.

Industry representatives said the effort is to spur domestic consumption and private investment by following up on the measures announced in the Union budget. “The need of the hour is for monetary policy to complement the fiscal policy and strengthen the growth impulses that are slowly building in the economy," said Sandip Somany, president of industry chamber Federation of Indian Chambers of Commerce and Industry.

The National Democratic Alliance government led by Prime Minister Narendra Modi, which earlier took decisive steps to reform and formalize the economy, is now seen to be giving relief to sections of the society that faced disruption caused by structural changes, such as the high-value currency ban in 2016 and the rollout of the goods and services tax (GST) in 2017.

The RBI’s move, which seeks to appeal to the sentiments of the middle class and small farmers, comes after the sops-heavy interim budget for FY20 presented on 1 February. Finance minister Piyush Goyal had announced a tax rebate for the middle class individual with an annual income of up to 5 lakh, besides rolling out a 6,000 annual basic income for farmers with small land holdings.

The tax rebate was a gesture of respect to honest taxpayers, Goyal said on an interview published in Mint on Thursday. The Union budget had sought to give relief to households, ranging from those at the bottom of the pyramid to the upper middle class. The budget had also offered relief to the salaried class by increasing standard deduction, and to those earning interest on deposits by raising the exemption limit on tax deducted at source.

These budget announcements were preceded by the GST Council lowering taxes on a host of items to give relief to consumers. The federal indirect tax body has in recent months been focusing more on easing the burden on consumers and small businesses than on revenue maximization. On 22 December, it cut taxes on 22 items, out of which seven were from the highest slab of 28%. Annual tax cut benefits of about 90,000 crore have so far been given to consumers, revenue secretary Ajay Bhushan Pandey said in an interview published on Monday.

Bad loans in agriculture and allied sectors have risen steadily over the past few years, touching 85,000 crore at the end of FY18, up from 52,000 crore at the end of FY16.