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Why RBI's repo rate cut is a non-event for the common man

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The Reserve Bank of India cut its key repo rate - the rate at which the RBI lends shot-term money to banks against securities -- by 0.25 per cent on Friday, the third time since January, but the central bank's decision is unlikely to provide any respite to consumers reeling under the burden of high equated monthly installments (EMIs). Interest rates on fresh retail loans are also unlikely to come down.

Diwakar Gupta, MD and CFO of State Bank of India, told NDTV that a repo rate cut does not translate into any difference in the bank's earnings and revenues, so it's hard to cut retail loan rates on the basis of a repo rate cut. State Bank of India is the country's largest lender.

When the repo rate comes down, borrowing from the RBI becomes less expensive, but these benefits accrue with a lag unlike a cut in the cash reserve ratio (CRR), where the effect is immediate. CRR is the amount of money banks have to park with the RBI. It currently stands at 4 per cent.

Malay Mukherjee, executive director at Central Bank of India, said, "We were expecting a CRR cut, in which case the benefits could have been passed to consumers immediately."

While some banks may still announce small cuts, bigger ones like SBI may take weeks before they come to a decision.

A 0.25 per cent cut in interest rate on a Rs. 50 lakh home loan for 20 years translates into minimum savings of Rs. 800 per month, analysts said.

Meanwhile, the RBI has advised banks to have management oversight to ensure pricing of retail loans is transparent, realistic, and related to the risk perception of borrowers. The direction came after the central bank observed wide variations in the rates of interest charged to retail borrowers by banks even when the loans were sanctioned on the same day.

Story first published on: May 03, 2013 13:49 (IST)

Tags: Reserve Bank of India, RBI, rate cut, interest rates, EMIs

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