Raghuram Rajan to Deliver Good News on EMIs This Week
EMIs on home and auto loans are likely to fall once the Reserve Bank comes out with a new methodology for determining base or minimum lending rates. RBI Governor Raghuram Rajan on Tuesday said that the new mechanism to calculate base rates will be announced this week.
Traditionally, the base rate has been calculated on overall (or average) cost of funds. The changes in average rate happen slowly due to longer tenure of fixed deposits, making it difficult for lenders to transmit repo rate reduction in real time, analysts say.
Since the rate reduction cycle that commenced in January, less than half of the cumulative policy repo rate reduction of 125 basis points has been transmitted by banks, the RBI said on Tuesday. The median base lending rate has declined only by 60 basis points, it added.
The new methodology would require banks to calculate base rate on marginal cost of funds, which will make it easier for lenders to pass rate cuts to borrowers. Marginal cost of funds is typically calculated using the latest rate payable on current and savings deposits.
“Our worry is that competition should not come in the way of banks passing on more lending rate cuts to customers. That is why we took a relook at base rates and that is why we are coming to the marginal cost pricing which would be announced later this week.
“That will give the banks the flexibility to move more quickly while the base rate would not allow the banks to move if they followed the average cost… The marginal cost will allow them to move much more quickly and react to the competition that is there in the market,” Dr Rajan said.
Analysts say once banks move to the new methodology, further transmission of repo rate cuts are likely. As a result, EMIs on home and auto loans are likely to head lower in coming days, they added.
The RBI held repo rate at 6.75 per cent on Tuesday, but Bank of America Merrill Lynch Economist Indranil Sen Gupta expects Dr Rajan to cut repo rate by 25 basis points on February 2.
“We see three reasons for a February rate cut. First, CPI inflation is set to achieve the RBI’s under-6 per cent January 2016 mandate. Second, growth is continuing to languish well below our estimated potential of 7-7.5 per cent. Finally, high risk-free rates will prevent lending rates from coming off,” Mr Sengupta said.
Read full article: NDTV
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