Home, car loan EMIs may come down as RBI cuts key interest rate by 0.25%

New Delhi: It is welcome news for the common man as their EMI burden on home and car loans is likely to come down soon after the six-member Monetary Policy Committee (MPC) headed by RBI Governor Shaktikanta Das cut the key lending rates by 25 basis points on Thursday (April 4). Worth mentioning here is this is the second back-to-back cut in policy rates in last two months. In the previous policy in February, the apex bank had reduced the repo rate by 25 basis points to 6.25%.

However, it is to be seen by how much percentage points banks are reducing their benchmark lending rate (MCLR, BPLR). Home and car loans are typically issued on a floating rate basis so that a change in key policy rates can be passed on to the borrowers. After the last reduction in repo rate, lenders including India’s biggest bank SBI had reduced lending rates by up to 10 basis points.

Banks and NBFCs were not able to pass on the entire cut in repo rate as the transmission in rates takes time. Deposit rates need to come down first so that banks cost of funds will reduce, allowing them to cut lending rates.

After the last cut in repo rate, RBI Governor Shaktikanta Das meet heads of PSU banks and asked them to pass on the reduction in repo rate to borrowers. However, banks were not able to oblige completely as deposit growth in the economy lagged loan growth. Meanwhile, interest rates on small saving schemes are also much higher than bank fixed deposit rates hindering further cut in deposit rates.

But given the second back to back cut in repo rate, banks are likely to reduce their deposit rates soon, following which lending rates may decline. “We welcome the rate cut, though we had expected a larger cut given benign inflation, slowing industrial as well as exports growth and liquidity concerns. We hope that the two consecutive cuts would translate into lower lending rates for both retail and corporate credit,” Sandip Somany, President, FICCI told news agency Reuters.

The RBI in its monetary policy statement has acknowledged that economic activity in the country has moderated and private investment needs to be pushed to achieve a higher growth rate. The repo rate cut announced today will also reduce borrowing rates for corporates and encourage them to increase their capital expenditure, analysts say.
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