Though the RBI cut the repo rate on October 20, most banks have not followed suit with cuts in loan rates. It will be some time before EMIs come down
While the Reserve Bank of India (RBI) has cut the repo rate (the rate at which the central bank lends short-term funds to banks), banks may not immediately pass on the benefit of lower interest rates to customers. So far only Punjab National Bank and Union Bank of India have announced a cut in their prime lending rates. The way things are panning out, it seems that the liquidity crunch is not over yet. Hence banks have adopted a wait-and-watch policy and a cut in consumer loan rates, at least for now, appears some time away.

Liquidity injection
In the past few weeks, the liquidity crunch in the financial system threatened to assume serious proportions. So the RBI announced a series of steps that cumulatively injected Rs 100,000 crore into the system. Here are the steps it took in quick succession:
Sep 16: RBI raises interest rate ceiling on NRI deposits; SLR floor relaxed
Sep 22: ECB limit relaxed
Oct 6: 50 basis points (bps) cut in CRR effective from October 11
Oct 10: Another 100 bps cut in CRR effective from October 11
Oct 14: RBI starts 14-day special repo auction to help MFs
Oct 15: Another 100 bps cut in CRR effective from Oct 11; CRR rate now stands at 6.5 per cent, down from 9 per cent earlier
Oct 20: RBI cuts repo rate by 100 bps (now at 8 per cent) with immediate effect

The impact
The rate cuts and other measures will help take care of two problems: ease short-term lending rates and make credit available. Says Abheek Barua, chief economist, HDFC Bank: ?The steps taken by RBI will certainly help lubricate the credit delivery process to corporates as well as to retail customers.?

On liquidity. With the availability of money in the system, experts feel that the liquidity crunch has eased. Whether the economy will require further interventions in future, only time will tell.
?The situation is certainly better than it was a few weeks ago. Things have started moving towards normalcy now. After the cut in CRR, the call money rates, which had touched 23 per cent, have come down to 6 per cent,? says Parijat Agarwal, head of fixed income, SBI Mutual Fund.

On corporates. With liquidity flowing back into the system, lending rates for short-term as well as for long-term loans are expected to move down. ?Lower lending rates would be positive for companies both in terms of cost of working capital and cost of term finance. That would have a positive impact on both growth and profitability,? says Barua.

On corporate earnings. ?I think by the next quarter the impact will be fairly significant,? says Barua. ?If we look at quarter two, sales growth was fairly strong, but earnings growth wasn?t that robust because of the input cost effect. I think what will happen in quarter three is that sales growth may come down but profitability growth could look up due to lower input cost,? he adds.

On retail consumers. The immediate impact on retail consumers would be softening of retail loan rates, but banks are yet to take a call and lower their prime lending rates. The reduction in retail lending rates would pep up consumer demand which is turning sluggish. In case banks pass on the benefit of one percentage point cut in the repo rate to customers, it can mean a lot of savings for the new borrowers as well as existing floating home loan borrowers. For a loan of Rs 75 lakh, a one percentage drop in interest rates would translate into a saving of more than Rs 5,000 per month.

Explaining why banks haven?t gone for rate cuts, Mohan Shenoi, treasurer, Kotak Mahindra Bank, says: ?According to my calculations, even after the CRR cut announced earlier this week, the banking system as a whole would be marginally negative in terms of liquidity after the next fortnight, starting 25th. If the system has to be kept in surplus, it would require another 50 bps cut in CRR.?

On rupee. The liquidity crunch that plagues the global economy has had its impact on the rupee as well. With cash starved Western financial institutions pulling out their investments from all emerging markets, India has witnessed $12 billion of FII money flow out. This dollar outflow has led to the rupee declining 26.3 per cent so far this year.
One impact of the rupee depreciation has been that a part of the relief that the government?s fiscal situation would have got from the decline in crude prices will get neutralised by the depreciation of the rupee. This may deter policymakers from cutting oil prices anytime soon. The depreciation of the rupee also means that foreign travel and foreign education will get costlier.

?The rupee will continue to be under pressure for some more time. It is under pressure due to the huge pullout of capital. There has been intervention but I don?t think it is adequate to support it. I think the rupee will move to 52-53 before it turns around,? says Barua.
Any relief you may have been expecting in your EMIs on existing loans or on new loan rates will have to wait for another day.