Borrowers gain; retired persons lose as RBI drops rates

Business

oi-Sunil

By Sunil Fernandes

Published: Tuesday, April 17, 2012, 13:04 [IST]

The good news for borrowers is that loan rates might drop and the bad news for retired people is that interest rates on deposits might fall. Borrowers who are looking at loans can wait, while retired people can lock up money today, before banks and others offering fixed income yielding instruments cut rates.

Loans, including floating home loans, personal loans and auto loans may see a decline should banks decide to pass on the benefits of repo rate cuts to individuals. The RBI cut repo rates by a surprising 50 basis points, as against a consensus estimates of 25 basis points.

Had the RBI lowered repo rates by 25 basis points, banks would have waited to study their own asset liability position, before taking a decision on cutting rates on loans and fixed deposits. However, a 50 basis points in repo rate cuts, improves the possibility of loan rate cut and deposit rate cuts.

Borrowers now stand to gain, while retired persons stand to lose, should banks decide to cut rates, which seems a likely possibility.

Repo rates are rates at which banks borrow from the RBI. So everytime the RBI cuts repo rates, borrowing for banks becomes cheaper and it generally signals lowering of interest rates in the economy.

In the past two years, the RBI has hiked repo rates 13 times and there has not been any cut in rates since the last three years.

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