An Insight into Lending Rate Changes
By Vaibhav Aggarwal
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In the second half of FY2008-09, the Reserve Bank reduced its lending rate (repo rate) by 400 basis points. Since then most banks have lowered the lending rate only in the range of 50-150 basis points till date.

Banks have been trying hard to preserve the lending rates. Experts reason that the rate cut cycle has nearly ended. However, in a real economy like India it is necessary to lower the lending rates for demand- induction. In other words, the monetary policy must be implemented to enable economic stability.

The article takes you through the journey of lows-highs of interest rates in recent past, the drivers behind them and challenges ahead ....

The global economic crisis underscores the need for fortifying the banking and financial system. RBI has been working to augment both, rupee and forex liquidity, strengthen the overall credit delivery mechanism. This intermediation process aims at long-term economic growth and stability. Following the crumple of Wall Street giant, Lehman Brothers Holdings Inc., the central bank has lowered the policy rate to 3.25 percent against the deposit rate of 3.5 percent.

As indicated in the table below, the central bank has reduced the repo and reverse repo rates by 400 basis points and 250 basis points, respectively since mid-September 2008. The bank has also reduced CRR by 400 basis points.


Drivers for  lending rates cut

·        Monetary and interest rate policy

·        Government Pressure

·        Strong fundamentals underlying Indian banking system

·        Industry demands

·        Economic conditions (liquidity crunch)

·        Economic indicators (WPI inflation rates)

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