A cut in the repo rate (the rate at which RBI lends money to banks) and the CRR (a proportion of deposits that banks have to keep with RBI), would ensure that cost of funds for banks get cheaper.

As cost of funds for banks reduce, they tend to reduce the interest rates for customers. This means that home loans, vehicle loans and personal loans could get cheaper. Of course, banks would study their own asset liability match or mismatch before deciding on interest rate cuts, but generally a cut in the repo rate and CRR tends to bring down interest rates.

While loans are likely to get cheaper, interest on fixed deposits are also likely to be reduced. This would affect retired individuals who depend a great deal on fixed interest income for their sustenance. Interestingly, with inflation at 7.55% and individuals still getting returns of around 9-10% on bank fixed deposits, the real rate of returns (interest-inflation) is still in the positive.

It's likely that the RBI would cut repo rates on June 18, 2012, but analysts are guessing whether this figure would be 25 or 50 basis points. Industry is hankering for a 50 basis points as growth in the economy has slowed considerably, but the RBI also has to contend with high inflation which is still prevalent in the economy.

If the RBI holds repo and CRR rates, its unlikely that banks will affect a change in their interest rates.

GoodReturns.in