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Monday, September 17, 2012

RBI cuts CRR: Home and auto loan rates expected to come down

MUMBAI: Your home and auto loan rates are expected to ease after the Reserve Bank of India slashed cash reserve ratio by 25 basis point to 4.50% in its mid quarter review of the monetary policy on Monday. CRR is the minimum proportion of deposits that banks must hold with the central bank. The CRR reduction is expected to inject Rs 17,000 crore liquidity into the banking system.

The move is primarily aimed at managing the tight liquidity expected in the next few weeks on increased currency leakage during the upcoming festive season, and to ensure smooth flow of credit to productive sectors of the economy.

Adequate and sustained liquidity will add to the banking and business confidence. We have seen a concerted reduction in deposit rates and eventually we will see lending rates softening. This will be translated into retail rates as well,'' said Rana Kapoor managing director and chief executive officer, Yes Bank.

The country's largest bank, State Bank of India has slashed interest rate on select retail loans including home and auto loans. Private sector banks like ICICI BankBSE 5.39 %, HDFC Bank and Axis BankBSE 4.37 % have reduced their deposit rates by upto 50 basis point.

Aditya Puri, MD & CEO HDFC Bank had also said,Interest rates are expected to come down as most banks have cut their deposit rates.''

Despite, adequate liquidity and low interest rates the loan growth has come down to less than 17% year on year in August 2012.

As per the IIP data, the industrial growth during the four-month period ending July 2012, contracted by 0.1%, as against the growth of 6.1% in the same period last fiscal.

During July itself, the growth rate slowed down to 0.1% from 3.7% a year ago. To boost sentiments and investment the government recently increased diesel prices by Rs5 and capped the subsidy on cooking gas. It also introduced select reforms by permitting FDI in aviation and retail.

The measures taken in the first week and the FDI reform augur well for economic revival and boosting business confidence. While it may not immediately catalyze investment and capital formation,'' said Kapoor.

The 25bps CRR cut would boost bank profitability by Rs2,000 crore, much higher than Rs75 cr cost reduction that a 25bps repo rate cut would have effected,'' said Sujan Hajra, co-head, research and chief economist, institutional equities, AnandRathi. We expect 50bps reduction in cost of funding of the corporate. Also, we expect yield on G-sec to soften by 100bps on the short and 25bps on the longer end,'' said Hajra.
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