BankBazaar.com CEO Adhil Shetty explains benefits for customers across segments.

After 36 months of high interest rate regime, RBI in its annual monetary policy review on April 17 slashed repo rate to 8% with a deduction of 50 basis points. Consequently, reverse repo rate (normally fixed at a spread of 100 basis points below the repo rate) now stands at 7%. This was indeed a much-awaited step by RBI which came after thirteen rate hikes since 2009.

This move of RBI is set to reduce the cost of home, auto and corporate loans, shifting focus to growth following consistent moderation in inflation. RBI however, kept the cash reserved ratio (CRR) unchanged at 4.75%. The marginal standing facility rate, which has a spread of 100 basis points above the repo rate, is now at 9%. As an after effect of the Union budget 2012-13, a rate cut by RBI to ease out the liquidity crunch in the market was highly expected.

This sudden reduction in the repo rate (rate at which RBI lends to banks), has been?prompted by the deceleration in growth which has been present since the global financial crisis in 2008 and a slight softening of inflation at present.

While some banks are yet to announce changes in lending rates some banks like the Canara Bank and the Union Bank have stated that with a rate cut they might consider a revision in base rate. Punjab and Sind Bank (PSB) has already announced a cut in home and auto loans for new borrowers up to 0.75 percent. SBI, which currently has the lowest base rate at 10%, has stated it would slash lending rates while leaving the base rate unchanged. ICICI and HDFC have also indicated a cut in lending rates soon. In due course however, base rate changes could be imminent if there is enough momentum created with the RBI rate cuts now and in future.

When lending rates are slashed it is likely to benefit new customers rather than existing customers. However, existing customers will have the option of shifting their loan to a lower interest rate to a new bank without any penalty! RBI in its recent review also announced a ban on prepayment penalty on floating interest rate loans.

The removal of charges is expected to minimize the discrimination between existing and new borrowers, as the competition among banks will result in better pricing of home loans in floating rate. If banks are hesitant in passing on the benefits of lower interest rates to the existing borrowers, they can switch to cheaper options available as pre-payment penalties will longer deter them from switching. Though several banks have, in the recent past, abolished the pre-payment penalties on floating rates, this policy ensures uniformity in this regard.

For the real estate players, this is indeed a welcome step taken by the RBI as both buyers and developers will benefit from this.?While banks expect a further rate cut to the tune of 25 bps in RBI?s next review to send a strong signal to lower lending rates, this may or may not happen. This expectation is backed on grounds that the trend of declining growth rates needs to be reversed by boosting investments. On other hand, an impending?fuel price?hike and an increase in core inflation which is expected to happen from next month, is likely to limit RBI`s ability to act in the near future.