Home loans turn cheaper as India's RBI cuts rate to 5-year low

By Staff Writer

Apr 06, 2016 05:29 AM EDT

India's central bank, Reserve Bank of India (RBI), has slashed the repo rate by 25 basis points to 6.50 percent. After the reduction, the rate declined to an over five-year low. As a result, home loans will be cheaper by half a percentage. This is the first rate cut by RBI in 2016 so far. It's estimated that banks borrow INR 80,000 crore ($12.3 billion) every day and reduction in repo rate will reduce the borrowing cost. 

Raghuram Rajan, Governor of Reserve Bank of India, in latest monetary policy review, has reduced the repo rate by 25 basis points to 6.50 percent. Repo rate is at which, RBI lends to banks. Rajan said that RBI would remain accommodative as the reduced lending rate would facilitate a quarter to half a percentage reduction in interest rate on home loans. Latest decision to cut the repo rate will reduce borrowing cost of banks that borrow INR 80,000 crore ($12.3 billion) every day.

The Times of India reports that latest surprise move by Raghuram Rajan was a step in the direction to enhance liquidity. The repo rate eased to 6.5 percent from 6.75 percent and it was on expected lines. Domestic stock markets, Bombay Stock Exchange (BSE) and National Stock Exchange (NSE), fell on profit booking. Sensex, India's market bellwether, shed over two percent to 24,884 points.  

Aman Agarwal, Director of KV Developers & Governing Council Member NAREDCO, said "The cut in repo rate is a positive development for the Indian economy and will certainly help in reviving sentiments amongst masses. This move will steer growth and is expected to infuse more liquidity in the system. The decision to cut the interest rate will now reduce the burden of EMIs on buyers and leads to more money in the hands of the consumer for greater spending."

The Financial Express further adds that the real estate sector has welcomed the RBI decision to slash the repo rate as it'll reduce the interest rate on home loans. For instance, a borrower of a home loan of INR 30 lakh (10 lakh= 1 million) with a tenure of 20 years at 9.50 percent interest rate is expected to save INR 1,17,104 after the latest rate cut of 25 basis points. Though, the rate cut will benefit new customers as well as existing borrowers, new customers may benefit from rate cut more.

Meanwhile, food inflation eased during the second half of the 2015-16 financial year. RBI notices that the drop in food inflation was due to the decline in prices rather than favorable base effect. Fuel prices have also edged down. Rajan forecasts further drop in borrowing costs and expects more pass through in next few months. 

Easing price pressure helped RBI slash the repo rate. Effective supply measures by the government are controlling food prices. The Indian government is also doing well on fiscal consolidation, according to RBI's Raghuram Rajan. The retail inflation rate declined to 5.18 percent in February 2016 after rising for six months in a row, as reported by The Hindu.

Several banks in India reduced interest rates just this month as part of switching to the new benchmark Marginal cost of lending rate (MCLR). The previous base rate was reviewed on quarterly basis. Now, MCLR is derived from incremental cost of deposits and reviewed monthly. MCLR will also be eased along with drop in deposit rates. However, the decline in deposit rates will be dependent on liquidity conditions in the country. 

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