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, founder, and writer of The Housing World, a real estate and mortgage news website. He has over fifteen years of rich experience in the above-mentioned industries.