The think-tank of the RBI’s Monetary Policy Committee (MPC) voted with a majority favouring a rate cut, thus, leading to reduction of the repo rate by 25 basis points; the rate got slashed to 6.25% from 6.50%. Repo rate is the rate at which the central bank lends money to commercial banks on short-term basis; also termed as the “key policy rate” it sets the tone for deposit rates as well as loan rates across all the banks in the country.
Due to economic upheavals in the last few quarters that can be attributed to geopolitical tensions and rise in crude oil prices leading to spike in inflationary headwinds, the repo rate had been hiked from 6% to 6.50%, making borrowing costly. The MPC had also been quite firm in its stance of the future possibility of rate cuts, taking a first-time-used term in India called “calibrated tightening.”
This time around, the RBI’s approach has softened from “calibrated tightening” to “neutral”, which is quite positive for the coming months on the rates. The surprise rate cut has gladdened the real estate segment that had seen dip in sales. Added to the woes was the liquidity crunch led by the crisis in the NBFC sector.
The rate cut and the stance taken augers well even for the home loan borrowers who can expect further rate cuts in the future, making borrowing cheaper. It would be interesting to see if the banks would be willing to pass on the benefit to the borrowers.
The biggest problem that the banks are facing is the improvement in credit off-take which will lead to making available ample funds to enable such borrowing needs. If the deposit rates are reduced banks cannot motivate depositors to deposit. Hence they have to keep the rates unchanged, else the lending rates will have to be hiked.
While depositors are not enthused if the interest rates are lowered, the borrowers would not be enthused if the borrowing rates are hiked. Banks will have to take difficult decisions whether to pass on the rate cut benefit or not to the borrowers.
However, the trajectory of future interest rate is quite conspicuous, leaning towards lower rates based on the present economic situation and also RBI’s approach.
Barring any aberrations within the country considering this is an election year and disruptions elsewhere in the world, the rates are expected to remain soft.
