Home loans to get cheaper as RBI cuts key rate after 3 years

GIVING A SHOT IN THE ARM

Slashes Repo Rate By 50bps To Fuel Growth No Penalty For Pre-Payment Zero-Balance Savings A/C

Mumbai: Home and auto loans are expected to become cheaper with the Reserve Bank of India cutting interest rates on Tuesday for the first time in three years by a more-than-expected half a percentage point. The move is aimed at boosting the sagging economy. 

    RBI in its annual policy reduced by 50 bps its repo rate-—the rate at which it lends overnight funds to banks and also announced a slew of consumer-friendly measures such as zero balance savings accounts for all and abolition of pre-payment charges for home loans. The availability of cheaper funds is expected to spur individuals to spend more and business to increase investment. It was expectedly cheered by bankers and industrialists across the board. 

Will curb govt expense: Pranab 

    Finance minister Pranab Mukherjee said the monetary policy announcement should help revive investment and strengthen business sentiment and promised that additional steps would be taken to reinforce the focus on growth. Though RBI flagged some concerns that could hurt growth and fiscal deficit, Mukherjee vowed there would be no slippage on fiscal deficit. "I will do my best to restrict the government expenditure to the budgeted figures," he said. P 21 

MAJOR POLICY MEASURES 

    50 basis points cut in repo rate signals shift of RBI's focus to growth 

    Liquidity support by allowing banks to borrow more from RBI 

    Economy expected to grow 7.3%, inflation 6.5%, deposits 16% and loans by 17% in 2012-13 THE BAD NEWS 

RBI wants govt to hike fuel prices 

Warns that future rate cuts not guaranteed 

Deposit rates could come down 

Inflationary pressures to continue 

THE GOOD NEWS 

Loans to individuals and businesses to become cheaper 

No foreclosure or prepayment charges on home loans 

Zero-balance savings accounts with minimum facilities to all bank customers 

Unique customer ID may pave way for savings a/c portability 

Banks not to provide undue returns for bulk depositors 

Fixed rate bank home loans may become a reality BOOSTER SHOT Is RBI rate cut a one-off affair? 

Mumbai: Giving the RBI's monetary policy a thumbs up, the BSE sensex closed 206 points higher at 17,357 points. It was buoyed largely by the magnitude of the cuts since it was only expecting a 25 bps reduction. Bonds rallied, with the yield on 10-year benchmark bonds falling to 8.34% from 8.44% on Monday. In the forex market the rupee rallied against the dollar to 51.49, up from Monday's close of 51.68. 

    While banks are unequivocal about lending rates falling, all of them may not pull down their rates immediately. "With the reduction in interest rates, EMIs will definitely fall. That is the good news. But how fast the transmission takes place…we will have to watch depending on our cost of funds. But clearly, the trend is downward," said Chanda Kochhar, MD & CEO of ICICI Bank, the country's largest private bank. The country's largest bank SBI is meanwhile looking at a 'comprehensive' reduction in lending rates. "On car loans and all other loans wherever the spreads over the base rate (benchmark rate for loans) are high, we will look at bringing down rates. I am not sure about the base rate but it is our asset liability committee that will take a call" said Pratip Chaudhuri, chairman, SBI. 

    The policy, designed to give growth a much needed push, predicted that the economy would grow at 7.3% even as it continued to remain concerned about inflation saying it would remain high at 6.5% in 2012-13. RBI governor D Subbarao denied that the government had any influence on the move. However, he said that the government needs to do its bit to 

spur growth. "Monetary easing is necessary but not sufficient condition for growth. The government should adjust oil and other subsidies and address supply side constraints," Subbarao said. 

    Besides addressing rates and setting forecasts for 2012-13, the policy also includes a number of announcements aimed at giving bank customers a better deal. New regulatory initiatives include specialized training to bankers to help them detect fake notes.