RBI in its monetary policy review has announced a reduced repo rate by 50 basis points; public sector banks SBI and Andhra bank have reduced their base rates by 40bps and 25bps respectively. This will result in deposit rates being cut as well effective October 5.
Base rates of banks stand in the range of 9.3-10% with SBI at 9.3%, followed by HDFC Bank at 9.35%, ICICI Bank at 9.7% and Andhra Bank at 9.75%. While RBI has lowered repo rate by 125 bps since January, banks have passed on a maximum of 70 bps.
Most private banks have decided to transmit a large part of the cut to its clients.
Banks foresee increasing retail credit demand, as car sales and commercial vehicle sales show an upward curve. RBI data showed that non-food credit grew 9.88% in September 4 fortnight to Rs 65.99 lakh crore and deposits grew 11.59% to Rs 90.3 lakh crore in the same period.
RBI also is looking at low value loans that are well collaterised, in order to bring down risks. Home loan rates are on a down ward movement and have become very competitive.
The cut on deposit rates are applicable only on new deposits and hence it will take about 2 quarters for the banks to realize the benefits of lower cost of funds. Loans will become cheaper which will affect their margins immediately. There is room for lending rate cuts, depending on the fall in cost of funds and on the definition of affordable housing for which RBI is looking at lower risk weights for home loans of lower value.
Source: Financial Express