Mumbai: In the first bimonthly review of the monetary policy in the new financial year, the Monetary Policy Committee of the Reserve Bank of India (RBI) on Thursday decided to cut the benchmark repo rate by 25 basis points (bps) to 6%. The rate cut was widely expected after the 25 bps cut in the repo rate in February from 6.50% to 6.25%. One bps is one-hundredth of a percentage point.
Depositors and borrowers are among those who watch the policy rates keenly as they do give a direction to deposit and lending rates, though the transmission is not proportionate and is gradual.
Deposit rates may go down
If you are a depositor, a falling interest rate means you will get lower returns from new deposits. Remember that fixed or term deposits booked at a higher rate in the past continue to give higher returns till the time of maturity.
With the cut in repo rate, banks are expected to reduce fixed deposit rates in the coming days. However, the reduction may not be proportionate to the cut in repo rate. This is due to the fact that credit growth in the economy in the past year has been higher than the growth in deposits. Banks need more deposits to be able to raise funds that they can lend. Accordingly, the reduction in deposit rates might not be proportional to the repo rate cut.
Shanti Ekambaram, president, consumer banking, Kotak Mahindra Bank Ltd, said deposit rates will go down in the next few months, though it will not be easy for banks to move deposits (downwards) because deposit growth is slower than credit growth. “Small savings rates are also very high. The provident fund rate has also gone up. So banks have to fight alternative avenues for deposits. The entire equation of transmission will be determined by deposit growth and how much banks can keep reducing their deposit rates going forward. Transmission will happen over the next few months. How the deposit rates reduction happens is key for how even the loan rates transmission happens in the future," she said.
EMIs won’t reduce Immediately
With RBI cutting the benchmark repo rate by 50 bps since February 2019, retail consumers will expect a reduction in their EMIs on various loans, especially home loans. However, the impact in EMIs would not be visible soon. “No substantial relief is expected for borrowers in their monthly loan instalments as banks are unlikely to induce a large cut in their benchmark lending rates," said Anil Gupta, sector head of financial sector ratings at Icra Ltd.
There are two reasons for this. The first is that floating rate retail loans like home loans are based on the marginal cost of lending rate (MCLR), which never goes down in proportion to the repo rate cut. This is because a bank’s cost of funds also includes deposit rates, which are not dropping proportionately either. That is why after the 25 bps repo rate cut in February, some leading banks reduced loan rates by a marginal 5-10 bps.