Loans have become cheaper after the Reserve Bank of India (RBI), in a surprise move, on Tuesday cut interest rate by basis points from 7.25 per cent to 6.75 per cent with immediate effect. The bolder stance by the central bank is seen as a move that will boost the slowing economy.
Major lenders like Andhra Bank, SBI, Bank of India and Axis Bank slashed their base rates after the RBI policy announcement. Andhra Bank cut its benchmark lending rates by 0.25 per cent, followed by State Bank of India that cut the benchmark lending rate by 0.4 per cent to 9.3 per cent. Bank of India also on Tuesday evening announced reduction in its minimum lending or base rate by 25 basis points to 9.70 per cent from 9.95 per cent, effective October 5. Axis Bank on Wednesday cut its base rate by 0.35 per cent to 9.50 per cent.
The rate cut by RBI will help both the new and exiting loan borrowers. The new customers will enjoy the benefit of rate cut as the banks will pass on the rate cut benefit to them anyway. For existing customers, if the bank had initially raised tenure when the rates were going up, the customer will first see the reduction in tenure and then later when the rates will go down, there will be a cut in the EMIs. For an existing customers the benefits will not be in the same proportion as the new customers. For example, if you have a home loan of Rs 50 lakh for a tenure of 20 years at an interest rate of 9.80 per cent per annum, then a 30 bps cut on the lending rate by any bank would mean that a borrower may save around Rs 980 per month on its existing EMI.
The central bank also proposed to reduce the risk weights on affordable housing applicable to lower value but well collateralised individual housing loans, which will boost the housing sector. At present, the minimum risk weight applicable on individual housing loans is 50 per cent.
“As opposed to the market’s expectation of a 25 basis points cut, the RBI has delivered an astounding 50 basis points reduction. I do not think any further rate cuts are likely in this financial year, especially since the RBI foresees a moderate growth in inflation rate in the interim months. For the affordable housing sector, the outlook is nevertheless bright, since the RBI governor has made provisions for lending to this sector to become less stringent and broader in scope, ” Anuj Puri, JLL India’s chairman & country head said.
Raghuram Rajan also said that banks should be able to pass on the entire rate cut of 1.25 per cent this year to borrowers over time.
It observed that banks have passed only an average of 0.30 per cent to the borrowers as against RBI’s 0.75 per cent cut to borrowers and blame the delays in repricing of deposits for the lag.
Here is Sunil Jain, Managing Editor of The Financial Express’ take on RBI rate cut:
“At a time when Indian cities are witnessing subdued housing sales, this correction in prime lending rates would help stimulate home buyers’ interest and spur home-buying decisions,” Sanjay Dutt, managing director, India, Cushman & Wakefield said.
The reduction comes on the back of interest rates being cut thrice earlier this year by 25 basis points each.
As the home and corporate loans will cost less after Reserve Bank cutting the key interest rate by 0.50 per cent. Paisabazaar.com gave a rough estimate on how home or auto loan amount will change owing to the RBI rate cut:
The article is first published at Financialexpress.com here.