Mint Explainer: How RBI's latest rate cut, change in stance impact borrowers, depositors
Summary
- The RBI's second repo rate cut should cheer retail borrowers with floating-rate loans, most of whom have already benefited from the previous cut of 25bps in February.
MUMBAI : The Reserve Bank of India (RBI) on Wednesday lowered the repo rate by 25 basis points (bps), taking the total cut in this easing cycle to 50bps. On top of that, RBI governor Sanjay Malhotra pointed out that the central bank’s decision to change its stance from accommodative to neutral meant that in the absence of any shocks, there would be no rate hikes now, only status quo or rate cuts. This should cheer retail borrowers with floating-rate loans, most of whom have already benefited from the previous cut of 25bps in February. One basis point is one-hundredth of 1 percentage point.
Mint explains how the latest RBI move would impact borrowers and depositors.
What does the RBI rate cut mean for borrowers?
For retail borrowers with floating-rate loans, this means a reduction of 25bps in interest rates. A decision to change the policy stance to accommodative would also mean that borrowers can breathe easy on rate cuts as long as the current stance is retained and there are no shocks.
Under the RBI norms, lenders need to reset their external benchmark-based lending rate at least once every three months. This would mean that borrowers will be able to benefit from lower interest rates once the lender resets the benchmark rate.
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Retail and small business loans are linked to external benchmarks, and corporate loans are still based on the marginal cost of fund-based lending rate or MCLR. External benchmark-based lending rate, or EBLR is linked to benchmarks like the RBI repo rate and is used to price loans. A rate cut would also mean cheaper loans for businesses, albeit, depending on how deposit rates come down.
How will the latest rate cut impact depositors?
After holding on to high deposit rates for several months on the back of a deficit in system liquidity and fearing outflows, banks decided to start lowering deposit rates in April. Wednesday’s cut of 25bps in the repo rate would embolden them to go for more deposit rate cuts to protect their margins.
While lending rates for the majority of floating-rate loans are linked to an external benchmark like the repo, deposit rates are not. Therefore, even as lending rates reprice, deposit rates are not immediately changed, leading to pressure on margins. While this helps banks during rate hike cycles, it compresses their margins during periods of rate cuts.
That said, cutting deposit rates would take time to show up in margins because, unlike loans, rate revisions apply only to fresh deposits, while the bank must pay unchanged rates on existing loans until they mature.
Will the RBI decision impact credit growth?
A rate cut is expected to push credit growth, raising demand for cheaper funds. However, banks have been cautious about certain segments of retail loans, such as unsecured credit, following the RBI’s move to raise risk weights in late 2023. The retail segment has been driving credit growth, with corporate loans playing second fiddle.
Also Read: RBI cut repo rate in Feb. Why did it take so long for banks to reduce interest rates?
RBI data showed that the growth of retail loans slowed down to 14% year-on-year (y-o-y) in February, as against 18% in the year-ago period, excluding the impact of the merger of HDFC Ltd and HDFC Bank. On the other hand, loans to industries grew 7.3% in February, as against 8.4% in the previous fiscal. Moreover, bankers and other experts have been hopeful of a revival in corporate credit demand and an ensuing growth in private capital expenditure. That has so far remained elusive.
Mint reported on 1 April that India’s investment report card received a significant boost from high-cost government projects in the March-ended quarter, providing a potential last-minute push after a slow year, even as private sector appetite remained subdued.
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