RBI cuts rates, loans to become cheaper

Sanjeev Sharma

Tribune News Service

New Delhi, September 29

In a bonanza for households just before the festival season, home and auto loans have become cheaper as the Reserve Bank of India (RBI) has cut interest rates by 0.5 per cent. The flip side is that for those relying on savings, interest rates across the board on small savings schemes and fixed deposits are set to come down.

In a surprise move, RBI Governor Raghuram Rajan cut the benchmark repo rate by 50 basis points in the monetary policy review today, more than the anticipated 25 basis points. Rajan called it “frontloading of policy action”. The repo rate has been cut from 7.25 to 6.75 per cent, the lowest in around four-and-half years.

Interest rates have been cut by 125 basis points this year, but their transmission or passing on to the customers by banks has been slow. Following the RBI action, the country’s largest bank State Bank of India (SBI) announced that it was slashing lending rate by 0.4 per cent from October 5. Andhra Bank has also cut rates by 0.25 per cent.

Apart from boosting demand in economy, the RBI move is geared towards accelerating investment and industrial growth at a time when the global growth outlook is getting weaker and commodity price slump is helping consumer countries such as India.

The flip side of the fourth rate cut in 2015 and its accumulated effect is that the depositors will get lower income due to a fall in interest rates across the board.

The government immediately announced after the RBI Governor had mentioned it that it would review the interest rate on small savings, PPF and post office deposits, to bring them in line with the market dynamics. Banks had been complaining since fixed deposits also compete with small savings, it would be difficult for them to reduce deposit rates below a point.

On the impact of fall in rates for consumers, Rishi Mehra, co-founder of Deal4loans.com, said home and car loan rates should fall by 50 basis points. Home loan rates were expected to come to a level of 9 per cent, he added.

The RBI Governor said since our last review, most of the conditions for further accommodation had been met. The January 2016 target of 6 per cent inflation was likely to be achieved and investment was likely to respond more strongly if there was more certainty about the extent of monetary stimulus in the pipeline, even if transmission was slow, he said.

The RBI also announced a boost for affordable housing segment with loans to become less stringent. It announced to come out with a concept paper on “less cash society”. To promote electronic payments and use of cards for transactions, the RBI would put in the public domain a concept paper for proliferation of card-acceptance infrastructure in the country, especially in tier III to tier VI centres, by November-end.

It also announced liberalisation of overseas borrowing for corporates and increased participation of foreign investors in government securities.

Welcoming the RBI action, Finance Minister Arun Jaitley said the rate cut, combined with actions taken and planned by the government, would help boost confidence and investment. These would also help realise the economy’s medium-term potential growth rate, he added.

Jaitley said the government looked forward to the transmission of these cuts to the rest of the economy and would work to facilitate this transmission, including by reviewing the framework of small savings.