Banks hint at lowering lending rates after 25 bps rate cut by RBI

Banks hinted at lowering lending rates on Wednesday after Reserve Bank of India (RBI) Governor Raghuram Rajan sprang another surprise by announcing a 0.25-per cent cut in the short-term lending rate (repo) from 7.75 per cent to 7.5 per cent with immediate effect. This is the second surprise rate cut in two months paving the way for lower interest rates on home and car loans for consumers and cheaper borrowing for corporates.

Explaining the reason for reducing the repo rate ahead of the scheduled policy review, Rajan said, "Given low-capacity utilisation and still-weak indicators of production and credit off-take, it is appropriate for the Reserve Bank to be pre-emptive in its policy action."

Rajan also said that he expects banks to passing on the benefit of lower rates to customers soon. After the January 15 rate cut, only two state-run bank-Union Bank of India and United Bank of India-reduced their base rates. "The process of transmission is somewhat asymmetric. Banks tend to be a little faster in raising rates rather than cutting rates. I have no doubt that the pressure of the two rate cuts over time will feed into lower rates," he said.

Bankers hinted at lowering rates, but emphasised that monetary policy gets transmitted after a time lag. "Since there is a lag effect for monetary transmission, the effect of the previous 0.25-per cent cut together with the present reduction would accentuate banks to review their base rates," Indian Banks Association chairman and Indian Bank chief T.M. Bhasin said.

State Bank of India chairperson Arundhati Bhattacharya said, "Our bank will take an appropriate call of a cut in the base rate by looking at all evolving circumstances."

ICICI Bank managing director and chief executive officer Chanda Kochhar welcomed the rate cut, but did not say whether the lender will pass on the lower cost of funds to borrowers.

Soon after the rate cut, Chief Economic Adviser Arvind Subramanian said that global rating agencies should look at upgrading their stance on India's credit outlook. "Now, we have a 50 basis points rate cut (in two tranches within two months) and I think that is good for the economy and all rate cuts benefits... If the outlook is looking good, the rating agencies should draw their lessons from that om improving the outlook."

After presentation of the Union Budget last week, global and domestic agencies had ruled out any immediate upgrade in India's sovereign ratings and had red-flagged the country's delayed fiscal consolidation road map.

India Inc hailed the RBI decision. Associated Chambers of Commerce and Industry of India president Rana Kapoor said that action will surely boost the morale of consumers as also lower the interest costs of industry.

Real estate hailed the RBI's decision saying the move will help the sector to tide over the liquidity crisis. "The reduction in repo rate by 0.25 per cent is an excellent move as this should help the industry and business in general to tackle the liquidity crisis. In fact, there is further scope to ease the credit policy," Confederation of Real Estate Developers Association of India Chairman Lalit Kumar Jain said.