Will RBI rate cut reduce your EMIs?
Rate cut transmission may be delayed given slow build up in deposits
MUMBAI: Your equated monthly instalments (EMIs) on home loan and car loan along with your deposit rates are likely to remain unchanged for now despite the first repo rate cut since August 2017.
Rate cut transmission is likely to be delayed given the slow incremental build up in deposits.
On Thursday, the Reserve Bank of India (RBI) increased repo rate, the rate at which the central bank lends to commercial banks, by 25 basis points (bps) to 6.25% from 6.50%.
One basis point is one-hundredth of a percentage point.
Along with the rate cut, the monetary policy committee (MPC) also decided to change the policy stance from calibrated tightening to neutral. The central bank decreased the rate considering the lower than expected retail inflation.
According to bankers and analysts, you are unlikely to see an impact on deposit and lending rates immediately.
“Transmission of cut in policy rates in banks’ lending rates may be incomplete and delayed given the slow incremental build-up in their deposits. It may be challenging for banks to push credit growth without fastpacing their deposit base, which may require hiking deposit rates and that may be difficult in a rate cut cycle,” said Anil Gupta, vice president and sector head, financial sector ratings, ICRA.
The decision of a change in interest rate of home loans and car loans will have to come from the asset liability committee of individual banks and hence bankers say it is too early to predict the next move.
“In the last five months, liquidity in the system has been tight and most banks have increased interest rates on deposit and MCLR (marginal cost of funds-based lending rate). With this cut, we need to see how the rates of deposits move. With the demand supply situation, the credit growth has been strong and better than deposit growth. The demand for credit is higher than deposit growth making it little difficult to reduce deposit rate. We will have to wait and see,” said Shanti Ekambaram, president, consumer banking, Kotak Mahindra Bank Ltd.
Only if deposit rates are cut, will lending rate come down. “Both will go hand in hand. If deposit rates are cut then possibly there will be room for cut in MCLR because the computation of lending rate is totally a function of the rates offered to the savers. Credit growth after a long time has been sustainably higher at 15% which you need to match with deposit growth. How will you mobilize deposits with a cut is a big question. First there has to be a deposit rate cut followed by a cut in lending rates,” said Ashutosh Khajuria, executive director and chief financial officer at Federal Bank Ltd.
Though you may not see an immediate impact on your lending and deposit rate, a hint on lower interest rate cycle from RBI governor Shaktikanta Das indicates that their interest rate may come down in the second half of the year.
According to Radhika Rao, economist, DBS Group Research, the RBI governor’s remarks that “there is room to cut” suggests this is not a one and done easing.
“A sharp revision in the inflation outlook and limited spillover seen from a slippage in fiscal targets, paves the way for a shallow rate-cut cycle,” said Rao.
ALONG WITH THE RATE CUT, THE MONETARY POLICY COMMITTEE ALSO DECIDED TO CHANGE POLICY STANCE FROM CALIBRATED TIGHTENING TO NEUTRAL