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Job Well-done, Lower Rate Regime is Here to Stay

First policy of current fiscal announced amidst expectations of a rate cut, with something in store for the common man.

Published: 06th April 2016 05:08 AM  |   Last Updated: 06th April 2016 05:08 AM   |  A+A-

The first policy of the current fiscal was announced amidst expectations of a rate cut, with something in store for the common man. As has been the case in a number of previous policy announcements, RBI did not disappoint as it has cut rates while also catering to the needs of the banking system, by easing cash with the banks. This will in turn help them to lend at lower rates.

However, the key question remains as to what will be the reduction in rates for the retail customers, that can be answered in two parts.

Firstly, from April 1, a number of banks have already lowered their lending rates in accordance with the new formula that takes into account marginal cost of funds rather than the average.  The result has been that a bank like SBI has cut its 15-year home loan rate to 9.4% from 9.5%, while there have been other reductions too in other tenures. Secondly, RBI has further lowered the cost of funds by cutting repo rate, which further brings down the cost of money for banks. So going forward, under the new rules, banks will have to change in their lending rates in line with reductions in their own cost of funds.

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Given the latest policy, we believe that the cost of funds for banks will come down over the next few quarters, which in turn will mean lower rates for everyone. The actual quantum of rate cut will depend on how much each bank reduces their deposit rates and a combination of other factors. However, it is safe to say that we are likely to see lower borrowing costs in the coming months.

(The writer is an economist with Deloitte India and the views expressed here are his own)

MARKET cold to Policy

Investors were not too enthused by the RBI’s 25 bps rate cut. Sensex resumed lower at 25,372.44 and fell to a low of 24,837.51 before closing at 24,883.59, down by 516.06 points. This was index's biggest single-day fall since Feb 11. The NSE index Nifty after dipping below the psychological 7,600-mark, touched 7,588.65, before settling 155.60 points at 7,603.20.

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