Yet another monetary policy early this week has brought some bitter sweet news to banks/HFIs and borrowers. The Reserve Bank of India has increased the Repo Rate (money that banks borrow from RBI) by 25 basis points (0.25 per cent) to 7.75 per cent, thereby making the borrowing costly for the banks. At the same time a reduction in the Marginal Standing Facility rates (MSF is a short-term borrowing facility of banks that allows them to borrow after exhausting their repo borrowing limit) has made the last minute borrowing for the banks cheaper.
Should it be considered as good news on lending rates? No, not yet. Borrowers will have to wait for the banks to size the situation — whether it is conducive to pass on the reduction. As of now the home loan rates have neither been increased nor decreased and remain at last month’s level. The festive offers continue, which should be a good opportunity for home loan seekers to enjoy the benefits such as lowered interest rates and reduction in processing fee.
Since the RBI is concerned that deposit mobilisation is not happening aggressively banks will have to borrow from other sources to meet the credit demand. While inflation is still not at durable levels, banks and financial institutions are not sure if the central bank will cut the rates in the coming months. It is too early for them to consider any upfront rate reduction on lending rates.
In their quest to attract higher deposit mobilisation, if they increase the rates the lending rates would automatically go up which will not help resolve the issue. Deceleration in the credit off-take is always linked to higher lending rates which make borrowers either to defer their purchase/investment decisions or drop the idea completely. Both situation leads to economic slowdown.
Balancing act
The new RBI Governor has deftly managed to balance the inflation concerns as also push growth which is evident by his stance on repo and MSF. The liquidity in the banking system too has been good with various open market operations conducted by the RBI and also by way of government infusing capital into the banks over the last fortnight.
Borrowers have to wait for any reduction in their EMI outflow; it has been consistently hiked due to highly volatile economic conditions over the last two years. The serious concerns on rupee depreciation have reduced, thanks to the bold and progressive steps taken by the central bank. Only inflation-related concerns remain, which the RBI hopes would recede in the coming months due to encouraging monsoon activity this year.
The future does not look as bad as it seemed a few months ago and all the steps and measures that have been taken should start yielding desired returns, which should ease the pressure on lending rates on the home loan front.
