The cut in CRR and Repo rates is good news for borrowers, especially housing loan customers. A look by BALAJI RAO

The RBI Governor is still not happy about the inflation levels, and feels this is not a comfortable time to announce key rate reductions. But the RBI hasn’t completely disappointed the market. It has cut the CRR and Repo rates that will ease the liquidity in the banking system.

Instead of cutting interest rates (the market expected the RBI to cut at least 0.25 per cent this time around), it continued to make more funds available to the banks, only touching upon CRR & Repo so that lending activity will improve and banks can access cheaper funds while borrowing from the RBI.

The Repo rate has been reduced from eight per cent to 7.75 and the CRR stands reduced to four from 4.25 per cent. The reduction in CRR brings in huge liquidity to the banks. This can be use to lend at cheaper cost which is good news for borrowers, especially housing loan customers.

Repo is a term used in financial markets where the banks are allowed to borrow from the RBI when they face a money crunch or shortage of funds.

A reduction in Repo rate means banks can borrow funds at a cheaper cost and pass on such benefits to borrowers.

CRR is a portion of the deposits that banks will have to compulsorily park with the RBI.

This cannot be used for lending and also does not get any returns. CRR also is a measure by RBI to tighten liquidity with the banks which the banks otherwise would have used to lend.

Borrowers benefit

Soon after the RBI’s policy announcement on January 29, most banks decided to pass on the benefits to customers. The biggest beneficiaries would be home loan customers who can now get their loans at cheaper rates.

Most realtors have expressed their happiness with the ease of CRR which they feel will allow banks to lend without restraint, while the pace of home purchase would increase, and that would in turn help them in sales.

Even the reduction in Repo rate is good news for the real estate sector since the borrowers will be enthused to take home loans that will now be available at cheaper rates.

Despite the key lending rates not being reduced the overall feel-good factor seems to have come back for banks, real estate sector and home loan customers.

The buoyancy is expected to be more palpable in the coming days ahead of the RBI’s next policy announcement due in the first quarter of 2013-14.

Keywords: Repo rateCRR