Home, auto loans likely to get cheaper as RBI cuts key rates

But Banks May Not Change Deposit Rates

Mumbai: Rates on home and auto loans are set to get cheaper even as banks remain tentative about cutting deposit rates following a 25 basis points reduction in key rates by the 

Reserve Bank of India. However, this might be as good as it gets for borrowers, with RBI governor D Subbarao warning that inflation and the current account deficit will have to fall beyond expectations for further rate cuts. 
    Royal Bank of Scotland on Tuesday became the first to reduce lending rates following the RBI announcement. RBS cut its base rate by 75 basis points to 9%. Top lenders including State Bank of India, HDFC Bank, ICICI Bank and Bank of India too indicated that they would reduce lending rates. 
    Home loans leader HDFC said it would reduce rates as soon as its borrowing costs come down, which is expected to happen in three to four weeks. 
    In a positive development for retail customers, long term deposit rates are expected to hold. In fact, two days ago, ICICI Bank and Axis Bank had increased interest rates on deposits on some maturity slabs. Currently, the spread between interest rate on home loans and long-term deposits is less than a percentage point. Scope for 25bps base rate cut 
Mumbai:In the third quarter review of the RBI's monetary policy, governor D Subbarao announced a 25 basis points reduction in the Cash Reserve Ratio (CRR) to 4% and a matching cut in the repo rate to 7.75%. CRR refers to the portion of deposits that banks are required to maintain with RBI without earning any interest while the repo rate is the rate at which RBI lends overnight funds to banks. 
    The twin measures together will provide banks with headroom to reduce their base rate by at least 25 basis points. The base rate is a benchmark rate announced by banks based on their cost of funds. Interest on all floating rate loans, including home and some auto loans, are benchmarked to the base rate.Any reduction in the base rate will bring down cost of borrowing for all customers whose loans are set on a floating rate. 
    Subbarao said that although core inflation was low, food inflation continued to remain high and if it remained at these levels for long, inflationary expectations would build in prompting RBI to take monetary measures. "We have only one instrument—the interest rate. Using this we have to encourage investments by reducing lending rates, we have to discourage consumption, we have to improve savings and we have to reduce the current account deficit. It is an almost impossible task so it is a matter of judgment and balancing," said Subbarao. 
    The governor however remained tightlipped on when the RBI would issue guidelines for new bank licences. On controlling gold demand, the governor said that RBI has redesigned inflation bonds to come out with a product where both the principal and the return would be linked to inflation. According to Pratip Chaudhuri, chairman, State Bank of India, the country'slargest lender would stand to gain Rs 300 crore because of the combined impact of the reduction in CRR and repo rate. "We have the headroom to pass this on to borrowers without losing out on our margins," he said. He added that the bank's asset liability committee would meet on Wednesday to review lending rates. 
    Several banks, including Kotak Mahindra, ICICI Bank and Axis Bank, touched 52-week highs on the stock exchange. The BSE sensex however closed at 19,988, down 114 points from its previous close following hawkish statements from the RBI governor stating that there is little headroom for further reduction in rates. 
    "Banks are facing pressure in margins because of increased provision requirement on restructured loans. There are issues on asset quality where banks are required to make provisions. So banks will have to look at opportunities for evening out the impact on their net interest margins," said K R Kamath, chairman, Punjab National Bank.

A NECESSARY MOVE, BUT NOT SUFFICIENT

The rate cut has come at a time when there have been other positive moves. This will mean that monthly outflow on loans will come down, which will positively impact consumption. We expect further easing of rates going forward 
Kishore Biyani | FOUNDER & CEO, FUTURE GROUP

This was necessary. But it is not sufficient. The CRR cut is a pleasant surprise. However, the monetary policy cannot be a magic wand for growth by itself. It is critical that the recent non-monetary measures are taken to fruition 
Harsh Mariwala | CMD, MARICO INDUSTRIES

We were waiting for this for 9 months. Personally, I believe there are fundamental triggers that need to be pulled. RBI's decision might improve sentiments, but will it drive actual investments is another matter 
Kiran Mazumdar-Shaw | CMD, BIOCON

The industry appreciates the signal from RBI that it is ready to promote growth in addition to anchoring inflationary expectations. We would have appreciated a higher repo rate cut but, under present circumstances, the 25bps lowering does send the correct signal. In the months to come, we expect fiscal and monetary measures to work in tandem to ensure that growth is brought back 
Adi Godrej | PRESIDENT, CII