4 Mar : Signalling a further cut in home, auto and other loan rates, the RBI on Wednesday unveiled a fresh monetary stimulus that slashed the rates at which it lends and borrows short-term funds from banks by half a per cent.
RBI cut Repo (overnight lending rate) by 50 basis points to 5 per cent and Reverse Repo (overnight borrowing rate) identically to 3.5 per cent with immediate effect.
The decision, RBI said, "will further encourage banks to provide credit for productive purposes at viable interest rates. Bankers said rates would come down in the days to come.
The decisions will reduce the borrowing costs of banks, who have been citing high cost of funds as a key handicap for not passing on the full benefit to customers.
"It is a welcome move. This has given a window for banks to cut down rates but how soon and how much has to be decided by bankers individually," Bank of Maharashtra CMD Allen CA Pereira said.
This is the fifth monetary stimulus from RBI since mid-September 2008 to stimulate consumer spending, in addition to three fiscal packages announced by the government since December.
Finance Minister Pranab Muhkerjee, after announcing the third stimulus package in Lok Sabha last month, had said that it was now the turn of RBI to take measures to stimulate the economy.
The decision to reduce key rates follows a review of the current global and domestic macro-economic situation, the RBI said.
Even though banks have cut lending rates in response to RBI’s policy stance, the central bank said in a statement that "concerns over rising credit risk together with the slowing of economic activity appear to have moderated credit growth."
It pointed out that since the announcement of the third quarterly review of the monetary policy on 27th January, 11 banks have cut their BPLRs (benchmark prime lending rates) ranging from 25 basis points to 125 basis points. Several banks have also cut their deposit rates.
Noting that the impact of the global financial crisis turned out to be "deeper and wider" than anticipated earlier, the RBI said that banks should ensure that creditworthy enterprises should continue to get funding.
The central bank’s decision comes after industrial production fell, for the second time this fiscal, to two per cent in December and exports contracted 16 per cent in January.
"The services sector, which has been the main engine of growth during the last several years, has been slowing down. Business confidence has been dented significantly and investment demand has decelerated," the Reserve Bank said.
The total flow of resources to the commercial sector from banks and non-bank sources as of 19th February this fiscal shrank by almost Rs 1,00,000 crore.
Home loan rates may come down to 2004 level
Home loan rates may drop to its lowest level in the past five years as borrowing cost for banks will come down after the Reserve Bank’s slashing its key rates, bankers said.
"I think the prime lending rate could come down to about 11 per cent in a month’s time," UCO Bank Chairman and Managing Director S K Goel said.
"For this to happen, peak deposit rate should also fall to about 7 per cent, he said.
Home loan rats are available at about 2-3 per cent below the PLR. Five years back in 2004, home loan rates were in the range of 8 per cent," he said.
SBI has already reduced its home loan rate to 8 per cent for one year. Following suit, many other public sector banks reduced their housing loan rate.
With Wednesday’s cut, there is good case for rates to come down. Bank is likely to cut its PLR by 25 basis points in its board meeting to be held on 7th March, Goel added.
RBI cut Repo (overnight lending rate) by 50 basis points to 5 per cent and Reverse Repo (overnight borrowing rate) identically to 3.5 per cent with immediate effect.
The decision, RBI said, "will further encourage banks to provide credit for productive purposes at viable interest rates".