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RBI rate cut: Your EMIs may come down only next fiscal

Although some banks did say that they could cut lending rates but only in the next fiscal.

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This is the second time in as many months that Raghuram Rajan, Governor, Reserve Bank of India (RBI) has surprised the markets by cutting repo rates ahead of the monetary policy schedule. 

Seen as an important measure to kick-start growth so that banks can lend again to the industry, the repo rate cut is a significant measure to improve liquidity in the banking sector. 

The repo rate in the beginning of the year was 8% and after the two cuts, stands at 7.5%. 

However, banks' mere lip service won't work. They need to swing into action as well. 

The rate cut of a similar 25 bps on January 15, 2015 met with a cheer from the industry and banks alike. Banks even said that they will pass on the benefit to the industry and consumers. All but three followed RBI's footsteps. 

As the RBI lowers repo rate, the banks are likely to follow suit resulting in lower monthly installments for your home or car loan if they were negotiated on a 'floating rate'. 

However, even after the January 15 cut, leading banks, including State Bank of India did say that their boards will discuss bringing down rates but in the end they maintained status quo. 

This time around, too, SBI made a simialr statement.  Its chairperson Arundhati Bhattacharya said, "We welcome the repo rate cut by RBI. With government embarking on a path of qualitative fiscal consolidation and the formal adoption of inflation targeting, inflation trajectory is expected to stay benign and will aid banks in their decision-making. Our bank will take an appropriate call of a cut in base rate by looking at all evolving circumstances."

State-run Bank of Maharashtra's executive director R K Gupta said the rate cut shows the central bank's comfort about the quality of fiscal consolidation and is a positive for growth.

Also Read: How does RBI's rate cut impact you?

It remains to be seen whether the Budget cheer and this RBI surprise cut is enough of a nudge for banks to follow suit or not. 

Although some banks did say that they could cut lending rates but only in the next fiscal. 

Rajan, too, expressed concerns over the same. He said that the RBI was studying whether there were "institutional concerns" that are holding back banks from cutting rates. 

Earlier this month, Rajan had said that RBI cannot force banks to cut lending rates but competition will force them. 

Banks, however, rue that higher cost of funds is what's keeping them from cutting rates at the moment. 

It must be noted that the loan growth has been dismal and doesn't seem to be improving. Banks' stance of holding on to rates isn't helping the cause either. As the chart explains, Indian banks' loan growth have been on a downward path since November 2014. 

RBI even tried bringing down SLR to make banks bring down lending rates. 

Even during the monetary policy review oin February RBI has nudged banks by cutting Statutory Liquidity Ratio (SLR) by 50 basis points. 

SLR is the minimum net deposits with a particular bank that must be invested in government bonds, or hold in cash or gold. 

The RBI and Rajan have been under pressure from the industry and government for easing the monetary situation in the country. 

The Union Budget and the Economic Survey of last week did outline the need for easing of the monetary policy from the RBI's stable. 

CEA Arvind Subramanian, commenting on the rate cut, said that it will be good for industry. "Govt and RBI have a shared assessment of economic outlook,"  he said. 

The banks, too, have been asking the RBI to cut rates. 

India Inc, with their highly leveraged balance-sheets and falling profits have been pleading the RBI to cut rates so that their loans could get cheaper. 

All these efforts have been pointing towards a common aim to kick-start growth in the country by improving the investment climate. 

RBI rate cut to give a boost to economy; EMIs will come down significantly, said MoS for Finance, Jayant Sinha.

The banks blamed poor liquidity as a reason for holding on to their higher lending rates. 

With the Union  Budget largely accepted as pro-growth and applauded for its efforts to revive growth, RBI's move is definitely ahead-of-the-curve. 

But, will the banks follow this time around? One can only hope. 

(with agencies)

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