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Why interest rates on loans will not fall anytime soon?


Why interest rates on loans will not fall anytime soon?
The Reserve Bank of India cut repo rates (interest rates at which it lends money to banks) on Friday by 0.25 per cent.

Normally, when the RBI cuts these rates, it would be a signal for banks to reduce loan rates, including those on personal, home loans, gold loans and vehicle loans. However, it seems that this time banks will not oblige on cutting rates.


"There is no scope to cut rates. There is no compulsion on us to cut rates. In fact, there is nothing to transmit," Pratip Chaudhuri, chairman of State Bank of India said after the RBI credit policy.

Unless interest rates on bank fixed deposits reduce, banks will not cut interest rates on loans. However, if banks cut interest rates on fixed deposits investors may look at other options including post office deposits.

"We wont be in a position to lower lending rates unless deposit rates come down. But raising deposits even by offering 9 per cent is a challenge," Economic Times quoted C V R Rajendran, Executive Director of Bank of Maharashtra as saying after the RBI announced a 25 basis point cut in repo rate.

According to R K Bansal, executive director IDBI Bank does not expect immediate reduction in lending rates, "It would be difficult for banks to cut rates unless deposit rates comes down."

Had the RBI to cut its repo rate more aggressively by say 0.50 per cent, in place of 0.25 per cent, there would have been scope to cut interest rates. Also, there was no CRR Cut, which along with a repo cut helps to reduce lending rates.


Clearly, interest rates on loans are unlikely to fall soon. So, if you have been postponing a decision to take a loan on the hopes that interest rates would fall, you would perhaps have to wait for some more time.

Read more about: rbi repo rate
Story first published: Saturday, May 4, 2013, 9:53 [IST]
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