NEW DELHI: Home, auto and other loans are set to become cheaper, with Reserve Bank of India (RBI) reducing lending rate to banks by 0.25 per cent, which is lowest in the last five years at 6.5 per cent.
Banks are likely to decide on reducing interest rate for retail customers and corporates soon, that will bring down the equated monthly instalments (EMIs) substantially.
On Tuesday, RBI released its first bi-monthly monetary policy for the financial year 2016-17. It reduced the repo rate to 6.50 per cent from 6.75 per cent. Repo rate is the rate of interest at which banks borrow from the RBI.
All eyes and ears will be on the banks now as to how soon and to what extent they pass on the benefit to retail and corporate customers.
Traditionally, banks have not passed on the benefits of rate cuts to the retail customers. Banks use repo rate cuts to solve their structural problems. Encouraging banks to cut interest rate, RBI Governor Raghuram Rajan said, “Borrowing is cheaper and will continue to do be so.”
He said that banks have already cut interest rates by 0.25-0.5 per cent after introduction of new lending rate norm.
Effective April 1, State Bank of India, HDFC Bank, Bank of Baroda, and Canara Bank, announced their new lending rates that range from 9.20 to 9.85 per cent.
“Some of the banks have already reset their interest rates. Consequent to RBI’s announcement today, the banks will perhaps need to do some more transmission of reduction of policy rates of RBI,” Shaktikanta Das, Economic Affairs Secretary, told reporters.
This also means that RBI has kept the window open for more rate cut in June. “The cost of funds for banks will come down, which will mean lower rates for everyone,” Rishi Shah, Economist with Deloitte says. RBI on the assumption of a normal monsoon and a boost in consumption through the implementation of the Seventh Pay panel recommendations has retained the growth forecast at 7.6 per cent for the financial year.
Assuring support to the RBI initiative, Minister of State for Finance, Jayant Sinha, said “We will provide the boost to the economy that it needs.”
The stock market reacted negatively. The BSE index, Sensex, was down 516 points at the close of trading on Tuesday.