Urjit Patel goes for a repo rate cut of 0.25%; Hopes banks would pass on benefits to customers in 3-6 months; ICICI Bank takes cue, slashes base rate by 0.05%
For home and auto loan consumers, it is an early Diwali. Spreading festive cheers, banks are likely to cut interest rates on loans after the Reserve Bank of India (RBI) on Tuesday cut the interest rates at which it lend overnight money to banks (repo rate in banking parlance) by 0.25%.
Urjit Patel, the new RBI governor, hoped that banks would pass on the lower rates in next 3-6 months to consumers. "I agree that transmission to borrowers has been less than what anyone of us would have liked, and we are hoping that, over the next quarter or two, this will improve," said Patel.
Amid increasing risks, the move to slash the policy rate signals a clear departure from the policy followed by Patel's predecessor, Raghuram Rajan. While most banks are yet to take a call on the quantum of their reduction, ICICI Bank, India's largest private lender, became the first to announce a 0.05% reduction in its base rates.
So, ICICI Bank's lending rate is now 9.05%, the lowest in the market. State Bank of India (SBI), the country's largest lender, has a base rate of 9.10%. Arundhati Bhattacharya, chairman of SBI, said in a press note: "Banks will continue to transmit rates based on how much capital is available."
Praveen Kumar Gupta, managing director of SBI, added: "The lending rates have been coming down in line with deposit rates every month. So, certainly, we will look at revising our deposit rates before bringing down the lending rates."
Many banks have already cut their deposit rates and some are expected to slash them further before cutting their lending rates as well. With Diwali around the corner, banks are expected to come up with various festive offers on both car and home loans to boost demand by waiving off their processing fees and also bringing down interest rates for new borrowers.
"We were waiting to see the policy action. The repo rate cut has given us the room to have some special schemes for the festive season,"a senior official of a private sector bank said.
Since January 2015, the policy rate has been reduced by 1.5%, excluding Tuesday's cut. While public sector banks passed on half of the easing (around 40%) to consumers, private banks only passed a quarter of it.
Anuradha Basumatari, associate director, public finance, India Ratings & Research, said: "While borrowers are yet to receive the full benefits, depositors are feeling the full impact."
Real interest rate (the difference between 10-year G-sec and retail price inflation) in the economy declined to 2.06% in August 2016 from 3.69% in July 2015, according to Basumatari.
Ravindra Prabhakar Marathe, CEO and MD, Bank of Maharashtra, said that the rate cut is indicative of the softening of interest-rate regime in the economy. "Interest rates are bound to come down. Monetary policy transmission is already structured in the marginal cost-based lending rate (MCLR) methodology and is largely dependent upon the cost of deposits. At Bank of Maharashtra, we have already reduced our MCLR by 0.05% on October 1, 2016."
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