MUMBAI: Home loans will start getting cheaper from the end of the first quarter if RBI cuts its benchmark rates on Tuesday - a move widely expected by banks. Most bankers expect RBI to cut its repo rate for the first time in three years to improve business sentiment. Lenders also expect the central bank to infuse liquidity through a reduction in cash reserve ratio (CRR) to make up for the rupees it drains out while selling dollars to banks.
The repo rate, currently 8.5%, is the rate banks pay for borrowing overnight money from RBI. Although overnight borrowing is for very short-term mismatches in funding, banks have been consistently borrowing around Rs 80,000 crore to Rs 1 lakh crore, which indicates that for some lenders the overnight facility is turning to be the core source of funds.
If the repo rate is reduced by 0.25% the banking system will save around Rs 250crore. The savings would be far higher if there is a reduction in CRR. CRR refers to that portion of deposits that banks are required to maintain with the central bank without earning any interest. Last month, RBI reduced the CRR on bank deposits by 75 basis points to 4.75% - a move which improves bank profits by over Rs 1,500crore annually. "The last monetary policy, when RBI reduced CRR by 75 basis points, showed that governor is willing to surprise the market. This time too, it is possible that there may be some positive surprise," said M Narendra, chairman, Indian Overseas Bank.
D Subbarao, who took charge immediately after the global financial crisis in 2008 has been famous for what he describes as the `baby steps' approach. After an initial monetary stimulus following the crisis, Subbarao sought to fight inflation raising interest rates slowly and consistently by 25 basis points in every review. In December, he announced that the phase of increasing rates was over and any future move will be towards reducing interest rates.
The only catch was the precondition he set out for rate cuts. According to Subbarao RBI can bring down rates only if the government lives within its means and cuts down borrowing - a move which has not taken place.
Although the government continues to borrow high and inflation fuelled by oil prices continues to be a danger the mood weighs in favour of a rate cut. Most bankers feel that the governor has to come out with a `growth supportive' policy in view of the sharp slowdown in industrial production. But bankers are no longer unanimous. Last week, Pratip Chaudhuri, chairman of SBI - the country's largest bank said he expected RBI to bring down CRR by 75 basis points. Although he was not confident about it, he said that a repo rate reduction would be a big positive for sentiment. He said that while a cut in CRR would make loans cheaper, it may not cause banks to revise their benchmark base rates as this was dependent on other factors. If the base rate is not revised, old borrowers with floating rates will continue to pay the higher rate.
According to a poll of 20 analysts conducted by Reuters, 17 expect the RBI to cut the repo rate by 25 basis points to 8.25 percent on April 17, while three see it unchanged at 8.50 percent. Of 19 respondents, 13 expect no cut next week in the cash reserve ratio (CRR) requirement for banks, or the share of deposits lenders have to maintain with the RBI. Only four respondents forecast a 50 bps cut in CRR on April 17, while two see a 25 basis point cut.
Source : The Times of India, April 16, 2012
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