Tuesday's announcement by the Reserve Bank of India reduced its repo rate to 6.25 percent. The banks, in turn, lend it to you in the form of loans. "Banks have, however, increased the spread and term premia over the same period, effectively leaving the weighted average lending rate on outstanding rupee loans unchanged". The RBI cut rates to 6.25%, their lowest level in almost six years. "There is a possibility (of a reduction in lending rates) but our ALCO (asset-liability committee) will meet this month and decide that".
The easy liquidity conditions engendered by the Reserve Bank's operations should also enable the smooth transmission of the policy action through various market segments, he said. "So, certainly, we will look at revising our deposit rates before bringing down the lending rates".
"The first question that arises after this rate cut is, of course, how it will help improve buyer sentiment in the housing sector". Lower interest rates boost consumer spending which can cause an uptick in inflation. "Backed by a healthy set of macros, I expect 50-75 bps further easing in the coming months".
With the reduction of benchmark policy rate, all rates including Marginal Standing Facility stand reduced by similar percentage points. "Following this rate cut, it is critical for banks to reduce interest rates so that the benefits can be enjoyed by the end user", says Surendra Hiranandani, Founder and Managing Director, House of Hiranandani.
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".
"From a larger viewpoint - globally, risk to inflation is on the upside as rising global liquidity could result in firming up of commodity and fuel prices, especially at a time when OPEC is contemplating a cut in oil production to cap further fall in crude prices".
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.
Lower interest rates and consumption takeoff due to the 7th Pay Commission award and a good monsoon will revive rural and urban growth as well as pump prime the stagnant investment cycle. Monetary policy transmission is already structured in the marginal cost-based lending rate (MCLR) methodology and is largely dependent upon the cost of deposits.
Had the banks reduced the MCLR rates by 25 basis points, the EMI on a Rs 1 crore home loan would have come down by Rs 1,619 to Rs 90,617 per month from Rs 92,236 per month.