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Home, auto loan rates to ease as banks cut rates

Some hard talking by the Reserve Bank of India (RBI) governor Raghuram Rajan on Tuesday did the trick. A few hours after the central bank decided to hold policy rates and asked banks to lower interest rates for retail customers, taking cues from its previous policy rate cuts, three big banks brought down their base rate by 15 to 25 basis points (one basis point is one-hundredth of a percentage).

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Some hard talking by the Reserve Bank of India (RBI) governor Raghuram Rajan on Tuesday did the trick. A few hours after the central bank decided to hold policy rates and asked banks to lower interest rates for retail customers, taking cues from its previous policy rate cuts, three big banks brought down their base rate by 15 to 25 basis points (one basis point is one-hundredth of a percentage).

Country's largest lender, the State Bank of India (SBI), which controls 15% of total bank credit in the country, cut its base rate by 0.15% to 9.85%. This will also lower their home loans to 9.95% from the present rate of 10.10%. HDFC Bank, second largest private lender, cut its base rate by 15 basis points to 9.85% while late in the evening, ICICI Bank, the largest private bank, has announced a reduction of 0.25% to 9.75%.

ICICI Bank said the fixed rate customers will however not be impacted by the rate cut. It also announced a reduction in interest rates for some tenors of retail fixed deposits with effect from April 10, 2015.

Other banks are expected to follow suit and equated monthly installments (EMIs) are set to fall for both the retail and corporate customers.

Banks had no option but to cut their lending rates with the RBI governor saying that the notion that the marginal cost of funds is not fallen is "nonsense". In a media conference, the governor said that banks are sitting on money and that the marginal cost of funding has fallen. "The notion that it has not fallen is nonsense."

What made central bank hold policy rates?

The central bank said its Tuesday's decision to hold policy rates is because they are waiting for banks to lower rates after it lowered rates twice this calendar year, in January and March, each by 25 basis points. The central bank has also raised concerns about increasing inflation on account of unseasonal rains, hailstorms and supply constraints.

Will retail borrowers now see lower EMIs?

Bankers, quick to catch the cues from central bank, said that retail EMIs will come down. VR Iyer, chairperson & managing director, Bank of India, said the impact of reduction in cost of deposit experienced during the last quarter will encourage banks to pass on the benefit to customers.

Chanda Kochhar, CEO and managing director, ICICI Bank, said the interest rates can be expected to come down as the policy measures already taken reflect in banks' cost of funding.
Arun Tiwary, chairman and managing director, Union Bank of India, told dna, "There could be some room for a rate cut in June."

How many banks have cut deposit rates?

According to RBI data, 22 banks have reduced their medium-term deposit rates in the range of 7-53 basis points following the 50 basis points reduction in the policy rate in Q4, while 14 banks reduced their base rates in the range of 10-50 basis points.

RBI said in the policy statement, "Transmission of policy rates to lending rates has not taken place so far despite weak credit off take and the front loading of two rate cuts. With little transmission, and the possibility that incoming data will provide more clarity on the balance of risks on inflation, Reserve Bank will maintain status quo in its monetary policy stance in this review."

RBI has even said that any further cut in rates will be contingent on banks passing on rate cuts. "Going forward, the accommodative stance of monetary policy will be maintained, but monetary policy actions will be conditioned by incoming data. The RBI will await the transmission by banks of its front-loaded rate reductions in January and February into their lending rates," the policy statement said.

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