Rate cut Is Fine, its Prices that Matter

Feb 02 2013, 08:43 IST
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SummaryThe central banks slashing rates would offer the existing borrower a marginal benefit.

The central banks slashing rates would offer the existing borrower a marginal benefit. But for the real estate industry, it is only the right price point that can attract buyers

You may not deal directly with the Reserve Bank, but what we do, touches your life every day, says Governor D Subbarao in the advertisement commemorating the central banks 75th anniversary.

There is one occasion where the central bank touches peoples lives to a greater degree and that is when it eases interest rates, which it did on Tuesday. After maintaining the status quo over the last nine months, it relented and cut the repo rate by 25 basis points or 0.25 per cent. The rate, which now stands at 7.75 per cent, is the cost at which the central bank lends money to banks and forms the benchmark of the countrys financial system.

This drop usually means that banks pass on the benefit to their borrowers, reducing the interest burden on loans. This in turn draws more borrowers. The RBI action is estimated to inject Rs 18,000 crore into the economy. Banks have an urgency to increase their credit growth, so they will be looking at all opportunities, either through reducing base rate or some segments where they can lend better said Pratip Chaudhuri, chairman, State Bank of India. The countrys largest lender reduced the base rate by 0.05 per cent on Wednesday.

The one constituency that looks forward to such an announcement are the home loan borrowers on the floating rate, for it means a breather on the EMI front.

RBIs action was on expected lines. The repo rate reduction will facilitate banks and housing finance companies to reduce home loan rates marginally which will benefit consumers, says S. Sridhar, Advisor RICS-South Asia and former chairman, National Housing Bank.

Following the RBI decision, the National Housing Bank (NHB), the regulator and refinance provider to housing finance companies also slashed its lending rates by 0.25 per cent.

A home loan borrower would stand to gain marginally as illustrated in the table. For a loan amount of Rs 20 lakh at 12 per cent interest, the EMI currently payable is Rs 22,022. At a 25 basis point cut, the EMI on the same amount is Rs 21,674, a difference of Rs 348, or Rs 17 per Rs 1 lakh of loan amount.

Our Assets Liability Management Committee will examine as to what extent and

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