EMIs set to fall as RBI cuts rate by 35 bps

Your equated monthly installments (EMIs) for home, car, education and personal loans are set to fall after the Reserve Bank of India (RBI) cut the rate at which it lends to banks by 0.35%, the fourth in a row.

And it is not just the fourth round of rate cut that would bring down your EMIs and stimulate the consumer market. RBI has also reduced the money that banks have to set aside (risk weights) while giving a loan from 125% to 100%. This is set to free up about Rs 22,000 crore for additional lending in the retail sector, according to estimates from the economic wing of the State Bank of India (SBI).

Consumer credit is about 25% of the gross bank credit. According to the latest RBI data, gross bank credit stood at Rs 85 lakh crore.

Just after the RBI lowered interest rates, SBI, the country's largest lender, cut its one-year lending rate, to which most of its loans are pegged, by 0.15% to 8.25%. While new customers are going to get new lower rates effective August 10, the old customers will get this benefit when the loan comes up for reset.

SBI's new repo-linked home loans will be at 8.04%. The bank has sanctioned Rs 400 crore under its repo-linked home loans since its launch on July 1, 2019. HDFC Bank cut its lending rate by 0.10% a day before the RBI policy while anticipating a lowering down in policy rates.

SBI chairman Rajnish Kumar said, "The RBI's decision to cut repo rates by an unconventional 35 basis points is perhaps a recognition that the monetary policy works best with unanticipated surprises to market. The RBI has unveiled a host of bazooka measures to arrest the recent growth pangs even as it has marginally lowered its growth forecast for FY20." Meanwhile, SBI has decided to cut repo-linked lending rate by 0.35% and MCLR by 0.15% effective August 10.

On being asked about a faster reduction in rates by banks, RBI governor Shaktikanta Das said: "Monetary rate impulses have been transmitted fully through the financial markets. Weighted average call money rate declined by 78 bps, market repo rate is down by 73 bps and 10-year benchmark yield is down 102 bps. But banks have only transmitted 29 bps between February and June on fresh rupee loans."

"In my interactions with banks, they have indicated that they are progressively taking steps to lower their interest rates so that the benefits of policy rate cuts are reflected," Das said addressing the media after announcing the third bi-monthly monetary policy for 2019-20. "We expect higher transmission of policy rates by banks in the coming weeks," he said.

RBI has so far cut policy rates by 110 basis points and changed its stance to accommodative. But banks have claimed that the repo rate is only a fraction of their cost. The prime cost is the retail term deposits which are competing with the small savings rate at 8-8.5%. However, with the banking system flushed with liquidity and bank credit growth yet to pick up, a lowering of deposit rates has started taking place across banks.

RBI expects the credit flow to improve soon. "It is for banks to decide who they lend to. RBI is creating an enabling environment for banks to improve credit flow. I expect credit flow to pick up soon," Das said. "Banks are coming out of a continuous NPA cycle. They have faced losses for consecutive quarters so credit will pick up in the coming weeks and months."