HYDERABAD: After announcing a 25 basis points (bps) policy rate cut Thursday, RBI Governor Shaktikanta Das delivered another dollop for borrowers insisting that interest rates will only go one way - downwards. “The change in policy stance to accommodative means that rate hikes are off the table (in near term),” Das later said for brevity. So, one can safely expect lower interest costs on both loans and deposits, though much depends on the willingness of banks to cut rates.
At least in last four months, lenders remained reluctant to reduce rates, citing liquidity concerns, lower deposit mobilisation and higher rates for small savings schemes. But with liquidity in the banking system entering a surplus mode, markets anticipate faster transmission of rates to customers. “It remains to be seen whether the reduction of repo rate by 25 bps will trickle down to the actual borrowers, the earlier cut by 50 bps in February and April resulted in retail customers benefitting only by 10 bps or so,” said Monish Anand, CEO and founder, Shubh Loans.
While median MCLR (Marginal Cost of Funds-based Lending Rate) reduced by a mere 6 bps as against RBI’s 50 bps reduction in the past four months, weighted average lending rate fell by 21 bps for fresh loans. It means, there is not much respite for existing borrowers, which Das hopes will see transmission effect with a lag of four-six months. Moreover, for rates on home or auto loans to reduce, deposit rates will have to be first tweaked in order to reduce the bank’s overall cost of funds.
The good news is, the market is factoring in one or two more rate cuts in 2019, provided inflation or global oil prices don’t play havoc. When this happens, experts say, the real interest rate, which is currently steep, is expected to moderate. Former RBI governors had indicated a preference to keep real interest rates (adjusted for inflation) at 1.5 per cent. Repo rate at 5.75 per cent (after Thursday’s cut) after adjusting for inflation, hovers above 2.75 per cent.
“Three items that monetary policy could have addressed to improve transmission: better utilisation of the guidance tool in terms of changing stance, redrafting CPI target framework to make it targetable by linking it to a real rate framework and revisiting the liquidity stance,” said Suyash Choudhary, head (fixed income), IDFC AMC.