Long-term Loans to becomes cheaper as RBI cuts key rates

The long term loans like Home Loans, Auto loans and corporate loans are going to be cheaper as India's master bank Reserve Bank of India (RBI) Tuesday finally made an announcement to cut key policy rates which profits are likely to be passed to the customers by banks.

Taking a much-awaited decision, RBI today announced to cut Repo rate (RR), Reverse Repo rate (RRR) and Cash Reserve Ratio (CRR) by 25 basis points (0.25%) in the third quarter policy review.

The apex bank has reduced Repo rate - the short term borrowing of commercial banks from the master bank - from 8% to 7.75% which will provide more less burden on commercial banks.

Banks will pass this benefit to the customers which paves the way of reducing long term loans.

However, Banks were expecting to see a rate cut of 50 basis points (bps), but banks provides them the relief from another way via reducing Cash Reserve Ratio - the slice of cash commercial banks have to deposit to RBI - by reducing it from 4.25% to 4% which means Rs.18,000-crore will injected into banking system by RBI.

After that banks have more liquidity to lend loans.

As RBI has reduced Repo rate, the Reverse Repo Rate - the rate at which master banks borrows money from commercial banks - has automatically come down to 6.75% from 7% under the liquidity adjustment facility, which remain always 100 basis points below the repo rate.

This is the first time in nine months that the RBI is reducing its key lending rate. The last time the apex bank cut the rate was in April 2012, when it was reduced by a more than expected 50 basis points (bps).

According to experts, the cut in key policy rate came in the wake of RBI's prediction in reducing down the growth rate to 5.5% from its earlier forecast of 5.7%. This will be the most sluggish growth rate of India in last one decade.

This cut will definitely boost the growth rate, experts believe.

The RBI yesterday said that recent reforms have reduced the immediate risks for the economy, but emphasised on the need for more measures to restore investor confidence.

Flagging concerns about fiscal and external imbalances in the economy, the apex bank said that more reforms are required, especially in road and power sectors, to remove investment bottlenecks.