RBI rate cut – Will it help the borrowers?

The Reserve Bank of India has cut the repo rate by a sharp 50 basis point. Repo rate is the rate at which the RBI lends money to banks. It means the borrowing from RBI becomes cheaper for commercial banks. The reduction in repo rate has come for the first time in last 3 years. Currently the base rate of these banks range from 10% to 12% while the home loan interest rate varies between 11% to 14% and auto loans between 12% to 15%.

However, what matters to the common man is its impact on loans such as home loan, car loan or any other personal loan. Any decrease in repo rate makes borrowing cheaper for commercial banks. The lenders are expected to pass this benefit onto the borrowers by reducing the interest on loans. On the flip side, banks will decrease the interest rate on bank deposits.

But still the big question is, will the banks reduce the interest rates on loans? Will the benefits be available only to new borrowers or will it be passed onto existing customers? So far the responses of the banks in this regard suggest that lending rates will come down, although it might take some time.

State Bank of India (SBI) chairman Pratip Choudhary said, “Of course, the rate cuts will be passed on.” Further, he said, SBI might do a comprehensive cut but not across the board but only in particular segments.

Chanda Kochhar of ICICI bank said, “These measures would reflect in a reduction in lending rates.” But still he opines that the reduction in interest rate is not only for loan but also for deposits. He says, “In fact, a cut in the deposit rates is absolutely required because otherwise the costs of funds for the banks would not go down.”

“Both deposit and lending rates will come down, though it may take a while,” said Aditya Puri, CEO at HDFC Bank. He also said that the cut in deposit and lending rates will be in equal measure, by and large.

We had warned our readers about locking in fixed rate for home loans earlier. As you can see, those who are availed fixed rate loans cannot benefit from such a deflationary move. If RBI were to revise the rates downward further, we can expect such fixed rate products to vanish altogether. However, those with floating rate loans need to wait to reap the benefit and hope for further rate cuts if inflation remains in control.