Home Loans to Become Cheaper As RBI Cuts Repo Rate By 25 Bps

Published on: Apr 8, 2016 @ 22:05

Home loans and other loans are set to become cheaper in the coming months  with RBI reducing the repo rate after a gap of six months by 0.25 per cent to 6.5 per cent from 6.75 per cent.

Home  loans  and  other  loans  are  set  to  become  cheaper  in  the  coming  months   with  RBI  reducing  the repo  rate  after  a  gap  of  six  months  by  0.25  per  cent  to  6.5  per  cent  from  6.75  per  cent. The repo  rate, which  is the interest  rate  at  which  banks  borrow  short-term money  from  RBI.

The  Reserve  Bank  of  India  (RBI)  on  Tuesday  cuts  the  repo  rate  by  25  basis  points  to  6.50  percent.  In  the first  bi-monthly  monetary  policy  for  2016-17,    RBI  Governor  Raghuram  Rajan   announced  a  host  of  measures  to  improve   liquidity  supply   in  the market.

In  line  with  overall  expectations,  RBI  lowered  its  key  interest  rate  and  taking  the  total  cut to  1.5  per  cent since  January  last  year.   The  RBI  had  last  cut  its  short-term  lending  rate  in September  by  50  basis  points. Raghuram  Rajan  said   borrowing  rates  are  coming  down  significantly  and  after  today’s  rate  cut,  borrowings will  become  cheaper  further.

Cash  Reserve  Ratio (CRR)  is  the  proportion  of  deposits  that  banks  park  with  the  RBI.  The RBI  reduced  the minimum  daily requirement for  maintaining  the  CRR  to  90  per cent  from 95 per  cent  of  the  average  daily required  reserves  with  effect  from  April  16,  even  as  it kept this ratio  unchanged  at  4  percent  of  deposits.

The  retail  inflation  remained  along  the  RBI’s  projected  trajectory  target  of  6  per  cent   and is expected  to remain  around  5%  during  2016-2017.

At  a  post-policy  press  meet,  Rajan  said  that  the  monetary  policy  stance  will  continue  to remain accommodative. In  its  monetary  policy  review,  Rajan  retained  the  growth  projection  at 7.6  per  cent  for  2016-2017  set  by  the government ,  on  the  assumption  of  a  normal monsoon and  a  boost  to  consumption through  the  implementation  of  the  Seventh  Pay  panel recommendations.

Raghuram  Rajan  said  that  the  reduction  in  small  savings  rates  announced  in  March  2016, changes  to  the  liquidity  framework   announced  in  this  policy  review  and  the  introduction   of  the  marginal  cost  of  funds based  lending  rate  (MCLR)  should  improve  transmission  and magnify  the  effects  of  the  current  policy  rate cut.

The  reverse  repurchase  rate,  or  the  short-term  borrowing  rate,  has  been  adjusted  upward  to 6 percent  from 5.75  percent.

Earlier  leading  lenders  SBI  and  now  ICICI  Bank  cut  their  home  loan  rates  by  0.10 per cent  points  following implementation  of  a  new  interest  rate  calculation  regime  MCLR. The lending rates  of  other  banks  may  also fall  soon  with  the  marginal  cost of  funds-based lending  rate (MCLR)  system  coming  into  force  with  effect from  April  1.

If  the  banks  decide  to  pass  on  the  latest  policy  rate  cut  of  25  basis  points  announced  by RBI  on Tuesday, the  rates  for  borrowers  may  go  down  further. RBI  had  asked  banks  to price fixed-rate  loans  of  up  to  three  years  based  on  their  marginal  cost  of  funds from  April 1 and all  banks  have  to  follow  MCLR  system.

It  is  believed  that  the  steps  taken  by  the  RBI  to  free  up  the  liquidity  will  take  about  four to  six  weeks to come  into  effect,  and  as  a  result,  banks  would  wait  for  the  policy  decision to  translate  into  action  before reducing  rates.

The  new  lending  rates  or  MCLR  have  been  announced  just  at  the  start  of  the  month.  Only a  further  fall  in cost  of  funds  would  help  to  pass  on  benefits  to  borrowers  in  the  form  of cheaper  loans. Any  revision  in  loan rates  would  be  visible  next  month as  banks  have  to revise  these  each  month  under  the  MCLR  regime.

Ajay Verma

Ajay Verma, founder and writer of TheHousingWorld, a real estate and mortgage news website. He has over fifteen years of rich experience in the above mentioned industries.

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