Loans to become cheaper as RBI cuts key rate to 5-yr low

Loans to become cheaper as RBI cuts key rate to 5-yr low:

MUMBAI:Home loans and other borrowings are set to get cheaper by at least half a percentage point in the coming months following Reserve Bank of India (RBI) governor Raghuram Rajan's decision to cut rates by 25 basis points to 6.50% — an over-five-year low. Saying the RBI would remain accommodative, he said on Tuesday the shift to a new lending rate would provide the equivalent of an additional quarter to ahalf per cent rate cut.

Following the policy, the repo rate — the rate at which RBI lends to banks — has come down to 6.5% from 6.75% earlier, pretty much in line with market expectations. The surprise was the host of steps announced by Rajan to improve liquidity. But stock markets fell as the rate cut was widely anticipated and traders booked profits. The sensex, which had closed on Monday at 25,400 ended Tuesday at 24,884 — down 516 points or 2.03%.

Announcing the first rate cut for the year, Rajan said food inflation eased for the first time in the second half of 2015 16. This occurred on a decline in prices rather than favourable base effect. Similarly, fuel prices have also eased.

Borrowing rates are coming down significantly," said Rajan adding that he expected more pass through in coming months. On April 1 most banks reduced their lending rates in the course of switching to a new benchmark—the marginal cost of lending rate (MCLR). Unlike the earlier benchmark—the base rate which was reviewed quarterly — the MCLR, which is a rate derived out of incremental cost of deposits, is reviewed every month. Bankers say that with a fall in deposit rates the MCLR too would fall automatically. Reduction in deposit rates would depend on how soon liquidity conditions improve.

Besides cutting rates, Rajan said that he would infuse liquidity to ensure that shortage of short-term money—which is around one per cent of bank deposits of Rs 93 lakh crore—would vanish. At present, because of the liquidity deficit, banks borrow around Rs 80,000 crore every day. This increases their cost of funds and prevents them from reducing deposit rates. The governor narrowed the policy rate corridor to 0.50% from the earlier one percentage point, which resulted in the reverse repo rate—the rate at which banks park surplus funds with RBI—at 6%. He also reduced the daily requirement for maintaining cash reserve ratio to 90% of the statutory requirement from 95% earlier. CRR is the portion of bank deposits that has to be mandatorily parked with RBI. What this means is that while CRR continues to be at 4%, banks will need to borrow less as they were earlier overborrowing to meet the CRR requirement fearing a default. Given the tone of the RBI's statement, bankers expect more rate cuts to come.

"With global economic activity remaining subdued and domestic disinflation becoming entrenched amid low capacity utilization, I expect a further 125 bps monetary easing in the next 12months," said Rana Kapoor, MD & CEO, Yes Bank. On inflation projections, Rajan said going forward, consumer price inflation is expected to decelerate modestly and remain around 5% during 2016-17. On growth, the governor has retained the 7.6% growth target set by the government stating that the adherence to fiscal consolidation will support the disinflation process.