RBI Cuts Key Interest Rates
India’s central bank, the Reserve Bank of India (RBI) cut benchmark interest rates on Saturday. The central bank cut its key short term interest rate, known as the Repo Rate by 100 basis points from 7.5 per cent to 6.5 per cent. The RBI also cut the rate at which it borrows from the countries commercial banks by 100 basis points and the Reverse Repo now stands at 5 per cent, down from 6 per cent.
Housing Finance Companies (HFC’s) mortgage lenders who do not use deposits as a source of funding unlike the banks have not reciprocated or passed on the rate cut to their customers yet. Banks were monitoring the rapidly unravelling liquidity and economic story before committing to cut their consumer lending rates.
ICICI Bank was the notable exception to that rule, cutting its floating home loan rates for mortgages above Rs 2,000,000 or US$ 40,000 by 1.5 per cent, to 11.5 per cent. The cut in interest rates is only applicable to new borrowers however, with existing ICICI Bank customers having to wait for some time until the bank along with other lenders decides whether conditions are suitable to pass the full or even part of the cut onto existing customers.
HFC’s which obtain the majority if not all their funding through borrowing rather than deposits do not foresee an immediate reduction in their lending rates, as funding costs continue to remain high. Keki Mistry, managing director, Housing Finance Company HDFC said “Unless the lending rates of banks and our cost of funds come down, we won’t be in a position to reduce rates,”
The RBI in its statement said that it hopes that the interest rate cut “will improve the flow of credit to productive sectors of the economy on viable terms”. Analysts believe that banks will have to cut the interest rate they pay on deposits before being able to pass on any cut in official lending rates to their borrowers. An unnamed banker told the Times of India “many banks have recently hiked their deposit rates to attract customers. Now, they will start cutting the deposit rates,”
Though the RBI has addressed the cost of credit, the issue of credit delivery still remains unresolved. Banks over the last year have become increasingly reluctant to lend to all but their best customers as default and delinquency rates continue to rise.
“Even if there is a reduction in rates, I don’t expect banks would be eager to lend the money. They may be ready to offer money to customers with excellent track records, but won’t be overenthusiastic with others,” a senior banker told the Times of India.
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