RBI move may prompt banks to cut interest rates
By Joseph Samson
Mar 6, 2009
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The latest cut in the key policy rates by the Reserve Bank of India (RBI) brings a reason to cheer for the borrowers as it would lower the interest rates on all types of loans including home, car and other retail loans.

The repo rate, at which the RBI lends money to banks against collaterals like government bonds, has been reduced to 5% from 5.5%. Similarly the reverse repo rate, at which the banks park their funds with the RBI, has been reduced to 3.5% from 4%.

Announcing the rate cut, RBI stated: "It is expected that the reduction in policy interest rates will further encourage banks to provide credit for productive purposes at viable interest rates."

In fact following the RBI decision, Canara Bank announced a home loan scheme where interest rates have been fixed for the first five years. This step by the PSU bank is expected to be followed by others in the industry. Banks are likely to slash the rates and pass on the benefits to their customers.

SBI took the move even before the RBI slashed the policy rates. It has announced a special scheme under which new home loan borrowers are being offered an interest rate of 8%.

However RBI move would also result in translating the FD rates for the investors.

UCO Bank chairman and managing director S K Goel said, "Banks will soon decide to cut rates, which should help in reviving the economy."

In the past when RBI reduced the rates, banks passed on the benefit only to the new borrower without slashing the interest rates for the existing ones. However this time it is expected that banks would lower the interest rates for old customers on floating rates. This rate cut by RBI is likely to prompt the banks to reduce their PLR to which the floating rate loans are related.

Presently the home loan rates for most PSU banks are ranging around 10% and those of private sector are hovering at 11% to 12%.


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