The Reserve Bank of India (RBI) announced a reduction in the repo rate to 6 per cent, a level last seen in the first half of last year. The move by the RBI makes it cheaper for commercial banks to borrow short-term funds from the RBI. The equated monthly instalments (EMIs) that borrowers pay on home, car, personal and other categories of loans are set to come down in the near term, say financial analysts. At the same time, the interest rate earned by customers in fixed deposit (FD) and other term deposit schemes will also come down, they add.
Repo rate is the key interest rate at which the RBI lends short-term funds to commercial banks.
Today's rate revision - the second reduction this calendar year - means commercial banks will have more room to pass on the benefit of lower lending rates to loan borrowers. At the same time, it may also translate into a lower interest rate earned by depositors, say analysts.
"It is a very positive policy which should give a lot of comfort on cost of funds and instill some growth," Sanjiv Bhasin, executive vice president markets and corporate affairs at IIFL Securities told NDTV.
The interest rate on deposit schemes is likely to come down as the banks will have to maintain the spread between the interest rate at which it lends to public and at which it borrows and pays interest on those deposits, analysts said.
There can be moderation on asset and liability sides and there can be a 25-basis-point cut on deposits and lending depending upon banks. However, the banks can sacrifice on spreads they earn between lending and deposits if the volume growth on credit side picks up, Mr Bhasin added.
Since the last policy review in February, the commercial banks have lowered their MCLRs (marginal cost of funds-based lending rates) marginally, but more needs to be done, RBI Governor Shaktikanta Das told reporters in a press conference.
The RBI had prior to policy announcement also announced a $5 billion rupee-dollar foreign exchange swap wherein banks would get rupee in lieu of swapping dollar with the RBI for a period of three years.
"This we believe is a masterstroke from a liquidity injection perspective and such continued measures would certainly augur well for the fixed income markets," Lakshmi Iyer of Kotak Asset Management said.
Currently, the country's largest bank State Bank of India offers interest rates to the tune of 5.75-6.85 per cent to the general public on fixed deposit (FD) up to Rs 2 crore, the bank said on its website. The basic interest rate for home loan being charged by the State Bank of India for home loan up to Rs 30 lakh is 8.7 per cent per annum, according to the SBI website.
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