Home and retail loan borrowers can breathe easy, as the lending rates that were expected to go up amid a cash crunch in banks may not happen.
Giving the bank some elbow room, the Reserve Bank of India (RBI) on Monday announced a 0.50% point rate cut in its special lending window to banks, the Marginal Standing Facility (MSF).
This would bring down the average cost of funds, and more so for banks that have a higher share of funds from the central bank rather than depositors.
The MSF rate, the rate at which the RBI lends emergency funds to the banks, now stands at 9% from 9.5%. The RBI had raised the MSF rate in mid-July by 2% points to 10.25% to tighten liquidity in an attempt to curb volatility in the rupee-dollar exchange rate. The latest cut is a part of the reversal of that measure.
“It’s a positive step for retail customers also as the lending rates will not go up now as the cost of the borrowing will come down for the banks,” said NS Venkatesh, chief general manager, IDBI Bank.
With credit-deposit ratios of banks rising, experts were expecting lending rates to go up.
Banks would have had to raise more funds to meet the surge in loan demand in the festive season, which has just begun.
Also, Reserve Bank of India governor Raghuram Rajan had upped the repo rate (under RBI’s normal lending facility for banks) by 0.25% points to 7.5% in his monetary policy review on September 20.
Monday’s cut is the second reduction in the rate since September 20, when the MSF rate was lowered to 9.5% from 10.25%.
“MSF cut shows that RBI is comfortable with stability in the rupee,” said M Narendra, chairman, Indian Overseas Bank.