5 reasons why interest rates on loans won't fall

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The Reserve Bank announced its credit policy on Tuesday, cutting repo rates (interest rate at which it lends to banks) by 25 basis points. Despite the rate cut by the RBI, banks may not be able to cut interest rates on home loans, personal loans, education loans, auto loans and gold loan. Here's why?

Further easing difficult: RBI

The Reserve Bank of India has said that the prospect of further easing is limited. "Even as the policy stance emphasis addressing the growth risks, the headline for further monetary easing remains quite limited," the RBI said in its statement. This means interest rates are not going to fall anytime soon.

SBI Chairman not optimistic on rate cuts

Banks in India follow India's largest lender State Bank of India, which has now hinted at maintaining the status quo on interest rates. State Bank of India, Chairman Pratip Chaudhuri has said that there is no scope of transmitting the central bank's repo rate cut. "Repo rate cut will have no impact on loan, deposit rates," he said.

CRR left unchanged

Had the Cash Reserve Ratio been cut along with the repo rate, it would have helped fresh liquidity into the banking system. For State Bank of India, a 25 basis point cut in CRR translates to a five basis point cut in its base rate. But, a CRR cut did not happen.

Time lag for repo cut to take effect

There's always a time lag, from the time the repo rate cut is affected and when the transmission to loan rates take place. Though, there's no guarantee that repo rate cuts would lead to a cut in loan rates.

Base rate may not be cut

Indian Overseas Bank Chairman and Managing Director M Narendra said had this to to news agency PTI. "Banks would cut the lending rate when deposit rates, both short-term and long-term, start showing a decline. Base rates may not be cut at this point of time."

Read more about: interest rates, loans
Story first published: Wednesday, March 20, 2013, 8:42 [IST]
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