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 A K 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 per cent 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 R K 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 A K Bansal, both deposit and advances rates would come down.
Base rate of banks vary from 10 per cent to 12 per cent, while home loan rates are between 10.75 per cent and 14 per cent. Auto loans range from 12 per cent to 15 per cent.
Bansal said there would be reduction in fixed deposits rates, followed by cut in lending rates.
On the quantum of reduction, he said Alco of the bank would take a call taking into consideration all the aspect.
Terming the policy action as “pleasant surprise”, Dena Bank Executive Director A K Dutt said the reduction in RBI is more than what was being expected in the market. It was widely anticipated that there would be a cut of 0.25 per cent in the policy rate.
“Since the cost of raising fund has come down, there would some softening of interest rates. When and how much would depend on bank to bank,” Dutt said.
There would be reduction in fixed deposit rates as well, he added.