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The much anticipated and waited RBI’s Annual policy announcement happened today. With inflation and current account deficit dipping, the expectations of a rate cut were ripe. The Reserve Bank of India’s Macroeconomic and Monetary Developments for 2012-13 announced yesterday adopted a hawkish stance and said that the room for monetary easing was limited, as decreasing inflation was not as low enough.

The rate at which the Reserve Bank of India lends money to commercial banks is known as repo rate while cash reserve ratio or CRR is the portion of bank deposits that all commercial banks have to deposit with RBI. Meeting expectations, today’s announcement saw RBI cutting the repo rate by 25 basis points but kept CRR (Cash Reserve Requirement) unchanged at 4%, causing disappointment to the industry and stock market.

The repo rates, ie, the rate at which banks borrow from RBI is now changed from 7.5% to 7.25%.  Last cut was seen in March 2013 when the rate was brought down by 25 bps. Although inflation was a deterrent, the cut in repo rates is good news as it is likely to lower the cost of borrowing for both individuals and corporate. The main beneficiaries of this cut would be the home loans borrowers, auto loan borrowers and other rate sensitive sectors. It is also expected to prop up growth which had plummeted to 15 quarter low of 4.5%.

This time RBI has reinforced the regime of lowering interest rates as the cut in repo rate usually results in reduction of interest rates for borrowers. Hence a lowering of home loan interest rates is expected. But Repo cuts generally take time to show its effects. Following last revisions made by RBI, the banks adopted a cautious stance and did not go ahead with rate cuts. This time also borrowers are expected to wait little longer for interest rate on their loans to fall, even as the Reserve Bank of India has eased policy rates today. A CRR cut sees a faster cut in the loan rates as it leaves more funds with the banks for lending. Loan rates cuts would also bring in lower deposit rates.

Cutting of repo rate will be good for new borrowers if banks go ahead and cut their base rates. Old borrowers under floating rates can expect a revision in interest rate. The RBI Monetary Policy Statement also stated that there is a wide variation in the interest rate charged to retail borrowers by banks.

There has been a 40 bps cut since 2012 according to India Ratings. As there was wide expectation of a rate cut, in the same way, hopes for interest rates lowering are also high. The revision in the REPO rate will is also expected to have a positive impact in the real estate market and associated sectors like steel, cement, etc. So, lower interest rate on home loans is the need of the hour.

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