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INDIA BUSINESS WORLD - November 16th December 31st 2008
RBI CUTS BENCHMARK INTEREST RATE BY 1PERCENTAGE POINT: HOME, AUTO & PERSONAL LOANS TO BECOME CHEAPER
INTEREST rates on home, auto and personal loans are set to fall. Corporate borrowings will become cheaper, builders on the brink of default will get some leeway while manufacturing firms under stress will get a chance to restructure loans from banks.
In an eagerly awaited move, the Reserve Bank of India cut the benchmark interest rates by 1 percentage points. This will make money cheaper, give India Inc some breathing space and, hopefully, ignite the engine of consumption.
But the cut in banks’ lending rates that is likely to follow may not match consumer expectations. Most banks may cut rates by just about half a percentage points and hold back further rate cuts till deposit rates in the entire banking industry come down and loan delinquencies are checked.
Repo rate — the widely watched rate at which banks borrow from the RBI — has fallen from 7.5% to 6.5% while the reverse repo rate — the rate banks get for parking surplus money with RBI — has been lowered from 6% to 5% with immediate effect. A deeper cut in the reverse repo rate would have had a better impact since it would force banks to borrow rather than passively lend the money to RBI. Nonetheless, the raft of measures unveiled by the RBI is aimed at nudging banks to lower their lending rates and boost demand in the economy.
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