The recent repo rate cut by the Reserve Bank of India (RBI) brings cheer to borrowers as a reduction in lending rates in the economy will benefit loan takers. This is the fourth time key rate cut by RBI by 35 basis points (bps). RBI reduced the key policy rates by 25 bps each in the three previous monetary policy reviews.
Understanding the four times of rate cut in 2019 so far
The Central Bank started key rate cut from February 2019.
FYI - One basis point is equal to one-hundredth part of one percent.
By adding this rate cut of 35 bps, the Central Bank in total has reduced key policy rates by 110 bps.
As a result, the repo rate currently stands at 5.40 percent down from 5.75 percent.
Reverse repo rate also stands at 5.15 percent, reduced from 5.50 percent.
All these higher than normal rate cuts in the first half of the year and before the festive season is seemingly a signal for banks to cut lending rates aggressively.
Reaction of the banks
As the news brings cheer to borrowers, however, banks have lagged in transmitting the cut in rates to borrowers. As observed in the current easing phase, banks reduced their weighted average lending rates by 29 bps, compared to a corresponding 75 bps cut by the RBI.
SBI cut its marginal cost of lending rate (MCLR) by 5 bps across all tenors. Again after the fourth rate cut announcement, SBI cut MCLR by another 15 bps.
HDFC Bank slashed MCLR by 10 bps and Mortgage financier HDFC also reduced its lending rates by 10 bps for both new and existing borrowers.
Whether rates would further cut or not in the coming days would depend on the banks’ willingness to pass on the benefit to customers.
The impact on Real Estate
The real estate welcomes the RBI's move on rate cut but at the same time feels not good enough as the industry needs a deeper rate cut to make a significant difference to both the mid-income and affordable housing segments.
What Industry experts are saying?
Manoj Gaur, Affordable Housing Committee, CREDAI, said, “The repo rate cut by 35 basis points to 5.4 percent is a constructive move for the real estate sector. With the fourth consecutive rate cut, we expect the demand of housing to rise marginally. The rate cut is expected to further bring down interest rates on home loans and auto loans as the monetary transmission of previous policy easing has been limited. It will also help boost credit growth in the banking system”.
Pradeep Aggarwal, ASSOCHAM National Council on Real Estate, Housing and Urban Development, said, “Reduction in the repo rate 4 times in a row shows the RBI’s softer stand towards lending. A few banks have already passed on the benefits to customers. Also, keeping in view the incentives the government has given to the affordable home buyers recently, I am sure end users would now be more motivated to purchase their homes, post the repo rate cut”.