On the 29th of October 2002, RBI made its mid-term review of the Monetary and Credit Policy. After assessing the economic situation in India, the RBI governor, Mr. Bimal Jalan has reduced the bank rate by 25 basis points from 6.50% to 6.25%. This is the lowest level since 1973. RBI also reduced the Cash Reserve Ratio (CRR) to be maintained by all scheduled commercial banks by 25 basis points from 5.00% to 4.75%. At the same time, the repo rate was also reduced by 25 basis points from 5.75% to 5.50%.
Let us first define the various terms involved in RBI policy reviews.
The bank rate is the rate at which banks borrow from the RBI. This is also the rate at which central and state government borrowings, under the ways and means advances, take place. Any revision in bank rate by RBI is a signal to banks to revise deposit rates as well as Prime Lending Rate (PLR). SBI and BOB have already announced their revisions.
The repo rate is the rate at which the RBI borrows from the banks. This is also the floor rate at which overnight deals are struck. Besides lowering the cost of the funds, a lower repo rate will see the emergence of a short-term yield curve, since yields on a 91-day Treasury bill and repo rate will be the same.
CRR is the cash reserve ratio, which is the percentage of net funds that commercial banks have to park fortnightly, with the RBI to do business. Lowering of CRR means that more money comes into circulation. This is in line with RBI’s stated policy to provide a roadmap with the ultimate goal of reducing the CRR to 3%, which is the statutory minimum level. The direct impact of reducing the CRR is to release more money into the market at no additional cost to the bank or finance company.
Bimal Jalan has asked commercial banks to cut their prime lending rates
(PLR) - the rate at which they lend money to blue chip companies - and compress the band over it. All banks are expected to follow suit.
The RBI governor, Bimal Jalan, has sent a direct message to the consumers: Go ahead and buy a house with a loan that is getting cheaper by the day. RBI has sent out clear signals that overall interest rates must come down. The Indian economy with its stable rupee, strong foreign reserves, comfortable liquidity, low inflation and supporting global interest rates have helped shape RBI’s policy stance of softer interest rates ahead. RBI also wants the banks to pass on the benefits of the rates to borrowers. This is good news for the real estate industry, since housing finance interest rates will definitely head south. This will further spur the HFCs to widen their base for providing home loans to more people and boost the real estate markets all across India. The lower CRR will also release close to Rs. 3000 crore into the system, part of which will be in the HFC sector. Home loan seekers will get the biggest gains from this continuing drop in interest rates. Besides, these RBI measures will also elevate the bank’s income marginally and also enable them to manage interest rate risk better with lower interest rate risks for banks. This in turn will help the banks to lower the minimum requirements for their clients, enabling them to widen their base of customers and their reach. The overall lowering of the fixed deposit rates in the banks will also encourage individuals to look at other sources of investments including real estate as an attractive option.
The construction industry is on a marginal upswing and will benefit from the increasing trend among the middle class towards ‘borrowing to create assets’. Based on the RBI policy directions, clients also have a good fix on the interest rate trends, which will encourage them to request floating rates for housing loans. Single digit interest rates will now become the norm for home loans.
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