Home, auto and corporate loans are likely to become cheaper as the Reserve Bank on Tuesday slashed the short term lending rate sharply by 0.50% to 8%, signalling banks to cut rates.
The reduced cost of borrowing is expected to be passed on partially by banks to borrowers in the form of lower interest rate on loans.
"The RBI has taken a bold step. The reduction in the policy rate by RBI would translate into lowering of interest rates. Base rates are expected to come down by about 25 basis points," Canara Bank executive director AK Gupta told PTI.
Base rate is the minimum lending rate below which banks can't lend. Lowering that would mean reduction in all loans.
To bring down the cost of borrowings for banks, RBI slashed short term lending (repo) rate after a gap of 3 years.
Besides, RBI's move to ease liquidity situation would result in the infusion of much needed cash flows into the banking system, he said.
In the Annual Monetary Policy, 2012-13, RBI doubled borrowings under the Marginal Standing Facility for banks to 2% of their deposits with immediate effect to ease liquidity. It also permitted banks to borrow under the MSF even if they have excess government securities holdings.
IDBI Bank executive director RK Bansal said the monetary action will help boost growth and RBI has given a strong message to cut interest rates.
He said IDBI Bank would take a view on the interest rate at its Asset Liability Committee (Alco) meeting in the next few days.
According to Indian Overseas Bank executive director AK Bansal, both deposit and advances rates would come down.