RBI chops repo rate by 25 basis points to 5.15%

Your Equated Monthly Installments (EMI) are set to come down in response to the Reserve Bank of India's (RBI) shaving of interest rates by 25 basis points. The new repo rate announced on Friday, is 5.15%. Repo rate is the rate at which RBI lends money to banks. This is the fifth consecutive time that RBI is cutting rates to keep the cost of capital low revive growth. The rate-cutting cycle began in February 2019.

With banks having linked their lending rates to the new repo rate, all floating rates for retail borrowers will automatically come down by the same quantum. However, bankers will not be loose-fisted in handing out the reduced lending rates. The final rates for customers will have risk premiums attached.

To speed up transmission, RBI issued a circular in September making it mandatory for banks to link their lending rates to an external benchmark specified by it. "This is against the existing practice of banks basing their lending rates on condition endogenous to the banks," said Crisil, the global analytical company.

"Most lenders link their loan to the repo rate, but given the flexibility to charge a spread or mark-up, the final lending rates are yet to come down in a commensurate manner."

RBI has also given banks the flexibility to implement the new rates every quarter. For example, the new home loan rates from the State Bank of India will be 7.90% to 8.51%, but effective only from January 2020. The bank had revised its rates last month to 8.10% to 8.75% and these will be applicable until January when the new rates kick in. SBI's existing rates and the new rates will be the lowest in the market.

With this cut, RBI has effected a 135 basis point cut in policy rates since it began shaving rates in February 2019. But the lower lending rates have not translated to huge growth in loans. "For example," said chief economic advisor at SBI Soumya Kanti Ghosh, "total resource flow to the commercial sector during April-September is now barely at Rs 90,000 crore, as against Rs 7.36 lakh crore last year even as we are in the midst of an aggressive rate-cutting cycle, indicating it is not helping. We also must ensure a fair and level playing field for our bank depositors vis-à-vis borrowers in terms of the adequate real rate of returns in a country that has 41 million deposit accounts for senior citizens."

RBI's priority continues to be to revive growth by trying to keep the cost of capital down. The growth projections for FY20 have been revised to 6.1% from the earlier projection of 6.9%. "It is pertinent to note the RBI has drastically reduced the growth forecast," said VG Kannan, CEO, Indian Banks' Association.

"Given the muted global growth momentum, India's economic growth has to come from internal engines such as consumption and investments. Since both these indicators are showing signs of weakness, RBI has done its part by reducing the repo rate."

As for regulatory proposals, widening the eligibility criteria for microfinance borrowers would help the flow of institutional credit to needy customers. Internal Ombudsman for large non-bank prepaid instruments would speed up the grievance redressal mechanisms for customers. Providing liquidity support to banks with round-the-clock NEFT transfer will incentivise the banks to go for it, without any settlement worries.