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Loans To Get Cheaper As RBI Cuts Interest Rates

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Loans, including home loans, auto loans, personal loans, gold loans and educational loans may get cheaper, as the RBI today cut repo rates by 25 basis points.

Repo rate is interest rate at which the Reserve Bank of India lends money to central banks in the country. A cut in these rates tends to lower the cost to banks, which which pass on the same, by a cut in lending rates.

 

In the past, while the RBI cut the repo rates, banks did not cut by a similar amount their lending rates, this meant there was no transmission by banks in lending rates.

Loans To Get Cheaper As RBI Cuts Interest Rates
One reason why banks were reluctant to cut lending rates, is because they could now lower deposit rates. This was because, if they lowered deposit rates, it would be substantially lower than post office small savings interest rates.

This could lead to individuals moving away from bank deposits to deposits of post offices. However, the government has now intervened and has cut post office interest rates.

The government has now aligned these rates to g-sec rates. They would be reviewed every quarter. Therefore, banks can now easily pass on the cut in interest rates by the RBI to individuals.

Hence, it is likely that there is a possibility that banks begin to cut interest rates on all loans. However, one cannot be sure if the entire amount would be transmitted given the fact that rising NPAs, have hit margins and profits of banks very badly in the past.

One reason to be a little more optimistic is that unlike in the past, the Reserve Bank of India has also improved liquidity in the banking system, which should enable banks to transmit the cut in the repo rate.

All in all, expect deposit and lending rates to drop in the next few months, as banks take stock of their asset-liability match.

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