RBI repo rate cut might lower your loan EMI

Your Equated Monthly Instalments (EMIs) may come down after Reserve Bank of India's (RBI) announcement on Thursday to cut the repo rate at which it lends money to banks by 25 basis points. The central bank also hinted at further reductions.

Banks, however, may be able to give only a token cut of 0.05 to 0.10 per cent in interest rates as credit is growing far ahead of the deposit growth. Banks such as State Bank of India (SBI) may announce a reduction in lending rates faster as they have higher cash reserves which can support the lowering of rates.

This could trigger a rate cut from peers, but a lag is expected from some banks due to slower growth in deposits as against the credit growth. In other words, some banks do not have enough resources to fund the credit demand unless they mobilise deposits with higher rates of interest.

While credit is growing at over 14 per cent, the deposit growth is growing only at 9.3 per cent. If banks cut lending rates immediately, they will also have to cut deposit rates as the cost of bank funds is linked to this.

"The RBI meets (commercial) banks after the monetary policy meeting," said RBI governor Shaktikanta Das in the post-Monetary Policy conference, "The RBI will hold discussions with banks within the next two to three weeks to discuss the interest rates. We only set policy rate; the decision about banks' interest rates remains with them. But we hope the lending rates will come down."

The RBI lowered its consumer inflation forecast to 2.8 per cent for the quarter ending March 31, 2019, on account of favourable factors such as benign monsoon. The RBI also cut the retail inflation forecast to 3.2-3.4 per cent for the first half of 2019-2020 and 3.9 per cent for the third quarter.

Finance Minister Piyush Goyal said the move will boost the economy, lead to affordable credit for small businesses and home-buyers, and improve employment opportunities.

Most home loans, car loans and other loans are linked to the one-year MCLR (Minimum Cost Based Lending Rate) which is the base below which banks cannot lend. Most home loans are priced between 8.65 per cent to 9 per cent; and with deposit rates placed at around 8 per cent, there isn't much room for banks to manoeuvre to cut lending rates until the end of March 2019 when the demand for credit is the highest. If deposit rates are cut, then savers may desert the bank fixed deposit to migrate to small savings schemes where the interest rates are over 8 per cent.

"This will impact lending rates and improve market sentiment," said Pallav Mahapatra, chairman and managing director of Central Bank of India. "Banks that hiked their lending rates sharply, will have to bring them down. We hiked our MCLR only 0.05 per cent. The policy action certainly signals a softer interest rate regime."

According to RBI data, banking credit continued posting double-digit growth, registering 14.2 per cent on-year as of January 18, 2019. Deposit growth during this period was only at 9.2 per cent resulting in a funding gap which cannot be bridged if deposit rates are cut. Unless the deposit rates are cut, the minimum lending rate cannot fall as it is calculated through a formula taking into account the cost of the deposit.

"However, credit growth was still not broad-based as industrial credit growth continued to remain anaemic," said Crisil in a report. "As of December 2018, industrial credit (which accounts for 33 per cent of gross bank credit) grew at 4.4 per cent on-year, while the services sector (which accounts for 27 per cent of gross bank credit) and retail segment (which accounts for 25 per cent of gross credit) registered strong growth of 23 per cent and 17 per cent, respectively, driven by strong consumption demand and higher credit requirement by non-banks."