Get ready for some festive offers from banks after the Reserve Bank of India (RBI) lowered the rate at which it lends to banks (called repo rate in banking parlance). The lowering of rate will soften the cost of funds of banks, which is expected to be passed on as lower lending rates to borrowers.
While most bank chiefs refrained from commenting whether they are slashing lending rates anytime soon, analysts say that everyone is waiting to see the impact on their cost and that they would sooner or later be forced to cut rates to attract customers, if industrial credit fails to pick up.
RBI governor Urjit Patel said, "Banks have been selective in their rate cuts in aggressive segments such as home and auto loans, but there are many other segments, especially those where borrowers are still tied to the base rate, where they can do more. I think there is scope for banks to reduce lending rate for those segments. So far, they have not benefited to the full extent of our policy rate cuts."
After the 0.25% cut in the repo rate to 6%, the cost of funds for the banking system is expected to come down further. Home loan borrowers should get the advantage of lower Equated Monthly Installments (EMIs) as the lending rates are a function of the cost at which banks get their money.
While some banks like the State Bank of India (SBI) have lowered their lending rates by 2% since January 2015 when the rate easing cycle began , smaller banks that are yet to make such large cut may be forced to announce special offers. Most banks will cut their deposit rates and also their lending rates.
However Rajeev Rishi, chairman of Indian Banks' Association and Central Bank of India, says, "Since banks have already passed on previous rate cuts to customers, further action in this front will be examined with the changes in the signal rate."
Taking the cue from SBI's savings rate cut of 0.50% on Monday, most bigger banks such as ICICI and HDFC are likely to bring down interest rates on savings bank accounts sooner than later and may cut lending rates. The credit growth from industry is yet to pick up, the competition will heat up specially on retail loans such as home loans.
Ten big banks have the lowest MCLR (Marginal Cost-based Lending Rate, which is a floor below which banks cannot lend) in the range of 8% to 8.4%.
DB Mohapatra, managing director and chief executive officer of Bank of India, said, "Overall, the policy stance is neutral and the rate cut is expected to provide further boost to consumption which in turn will have a positive multiplier effect on the overall economy."
The rate card
0.25%
Reduction in key policy rate to 6%
0.25%
Cut in reverse repo rate to 5.75%
7.3% Growth forecast for the current fiscal unchanged. Focus on keeping headline inflation close to 4% on durable basis
$392.9 bn Forex reserves as on July 28
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