New Delhi: Interest rates could fall soon, making loans cheaper and saving less attractive, following a slew of measures by the RBI on Saturday. The central bank cut the rate at which it lends short-term funds to banks by half a percentage point and infusing an extra Rs 1,20,000 crore into the banking system.
Pressure on banks to cut rates has risen sharply in the past few days with the RBI making clear the crisis could only be resolved if banks followed up with measures to boost demand and sustain spending,
This would mean home, car and other consumer loans becoming cheaper by half a percentage point. Companies too can look forward to similarly lower lending rates. But, for depositors, the flipside of a rate cut is lower interest rates on savings.
Senior officials of public sector banks unanimously told STOI that rate cuts would follow very soon, perhaps within the week. They said they would follow through on the RBI’s move to contain the slowdown, even though they face a severe liquidity crunch because the central bank continues to suck cash worth $500 million every day in order to to support the rupee. Punjab National Bank chairman KC Chakrabarty said that banks are likely to take their cue from RBI’s decision to cut rates.
On Saturday, the RBI in its midterm review of policy announced that the repo rate — the rate at which banks can borrow short-term funds from RBI — will fall from 8% to 7.5% from November 3. This would make it easier for banks to cut interest rates for consumers.
Simultaneously, there will be a two-stage cut by November 8 of the cash reserve ratio (CRR) — the proportion of deposits banks have to maintain in cash with the RBI. It will fall from 6.5% to 5.5%.This will give banks access to an additional Rs 40,000 crore to lend.
| IN YOUR INTEREST |
Measure |
Impact |
Repo rate cut from 8% to 7.5% |
Cost at which banks borrow from RBI will come down so they can lend at lower rates |
Cash reserve ratio cut from 6.5% to 5.5% |
Banks need to park Rs 40,000cr less with RBI and can lend this money |
Special window for banks to borrow from RBI to lend to MFs enhanced from 0.5% to 1.5% of deposit base; NBFCs included in scheme. |
Another Rs 40,000cr available to lend |
Special refinance window for banks to borrow up to 1% of deposit base for 90-day periods from RBI |
Rs 40,000cr added to funds available to banks to lend |
