Reserve Bank of India (RBI) continues its efforts to make money available to banks, mutual funds and businesses. Reserve Bank of India on Monday cut the repo rate - at which it lends overnight to banks - by 100 basis points (or one percentage point) to 8%, pleasantly surprising bankers and the stock market, which had expected it to be announced as part of the RBI’s credit policy later this month.

Given that the repo rate is also used to signal interest rates, the reduction - the first since 2003 - could translate into cheaper house loans, car loans and other consumer loans, bringing cheer to retail borrowers, consumers and businesses.Few banks like Union Bank of India have reduced home loan rates by 50 basis points to 11% on Monday. Other banks may also follow this.

Finance minister of India, P. Chidambaram on Monday said the repo rate cut would serve to moderate inflation by lowering interest costs. ICICI Bank joint MD Chanda Kochhar said the repo rate cut indicated an easing of monetary policy but the impact on deposit rates would need to be seen over time. Bank of India chairman T S Narayanaswamy said interest rates needed to come down to make lending more viable.

HOW REPO RATE AFFECTS YOU

WHAT IS REPO?
The rate at which RBI repurchases government securities from banks. In return, banks get cash to meet their short-term requirements. When RBI wants to signal to banks to lower interest rates, it reduces the repo rate.
WHY IS IT NEEDED?
Banks give long-term loans against short-term deposits. So, they need short-term funds to avoid asset-liability mismatch
IMPACT
Floating home loan rates, rates on other consumer loans may dip

Benchmark lending rates for companies may reduce

May usher in a lower rate regime if liquidity stays easy

Rates expected to come down

While RBI has reduced the repo rate, banks however feel that it doesn’t necessarily mean interest rates will come down immediately. ‘‘It’s too early to comment on whether interest rates will come down immediately. It’ll be difficult for them to come down in a big way. However, there are indications that rates might fall,” said Ashish Parthsarty, a senior treasury official in HDFC Bank.

But with the global crisis freezing credit and money markets the world over, the government and RBI have been moving every lever of money supply to infuse liquidity into the system and get banks to lend to each other and to businesses and mutual funds.

News Source: Times Of India