All of you, who have opted for home loans at floating rates, have something to rejoice. Yesterday, the Reserve Bank of India (RBI) in its 3rd quarter review of monetary policy 2012-13 reduced policy rates by 25 basis points and infused liquidity into the system via a CRR cut of the same magnitude. Thus now with repo rate placed at 7.75%, bankers could contemplate reducing lending rates and approach this as an opportunity to increase credit growth as liquidity too worth Rs 18,000 crore, is flushed in the banking system (via a 25 bps CRR cut). Also in a press conference RBI Governor, Dr. D. Subbarao had said that banks had assured the central bank that loan rates would be brought down through a cut in the base rate.

So have banks indeed reduced lending rates?

Well, IDBI Bank has been the first to swing into action reducing its base rate by 25 bps to 10.25%. Likewise the National Housing Bank (NHB) – which is wholly owned by RBI, also reduced (on the date of 3^rd quarter review of monetary policy) its Prime Lending Rate (PLR) to 9.75% (from 10.00%). But Royal Bank of Scotland (RBS) on the other hand, reduced its base lending rate rather aggressively from 9.75% to 9.00% (a cut of 75 bps!) The base rate is the benchmark to which all loan rates are linked.

What will be the impact of this move on borrowers, industry and economy?

We are of the view that, transmission of lending rates will help reduce the interest component of Equated Monthly Instalment (EMI) of borrowers of home loans (and car loans, if rates are reduced in auto loans segment as well), and thereby facilitate reduction in repayment tenure on loans and providing some relief to household budgets.

For the banking sector reduction in lending rates with positively impact loan growth. Overall this would provide fuel to robust consumption story of India, thereby resulting in consumer durable, auto and real estate amongst, others doing well.

The aforesaid may also depict a positive impact on the economy because an increase in fixed capital formation (through high corporate sector lending) will also result in impulse for economic growth.

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