Home loan interest rates, auto loan interest rates and personal loan rates maybe cut by banks, as the Reserve Bank of India (RBI) today cut the repo rates by 50 basis points.
Repo rates are interest rates at which the RBI lends money to commercial banks in the country. They are also called bank rate.
The RBI Monetary Policy today cut the repo rate from 7.25 per cent to 6.75 per cent, making the current repo rate at 6.75 per cent. This is the fourth such cut by the country's central bank in 2015 and is a full 1.25 centage cut this year. However, the RBI has been unhappy that banks in the country have been slow to cut their interest rates on loans.
While the country's central bank has cut rates by 1.25 per cent, many banks have just cut their own lending rates marginally.
Banks have been reluctant to cut lending rates because they have to then cut deposit rates. They fear that a cut in deposit rates would mean that it pushes the deposits rates way below that of small savings schemes.
At the moment post office small savings schemes offer an interest rate of 8.7 per cent, while the maximum that State Bank of India offers on term fixed deposits is 8 per cent. This means that individuals would be forced to place money in post office small savings schemes rather then bank deposits.
In any case, banks will cut their lending rates only after working on their own asset-liability matches and mismatches.
But, today's cut in repo rates of a higher then expected 0.50 per cent will pressurize banks to cut their lending rates making home loan interest rates, personal loan interest rates and interest rates on auto loans cheaper. One reason why there could be a cut in lending interest rates on home loans, auto loans and other loans is because the RBI is unhappy with cutting own rates, while banks cutting their lending rates only marginally.
"The median base lending rates of banks have fallen by only about 30 basis points despite extremely easy liquidity conditions. This is a fraction of the 75 basis points of the policy rate reduction during January-June, even after a passage of eight months since the first rate action by the Reserve Bank. Bank deposit rates have, however, been reduced significantly, suggesting that further transmission is possible," the RBI has said in its Monetary Policy release.