If you think RBI’s 35 bps surprise rate cut is big bonanza for common man, the joke is on you; here’s why

Post-Reserve Bank of India’s 35 basis points (bps) rate cut on Wednesday, a few big banks have announced a reduction in their lending rates. (One bps is one-hundredth of a percentage point.) A few hours before the policy announcement, the country’s largest lender, State Bank of India (SBI), cut its marginal cost of fund-based lending rate (MCLR) by 15 basis points across all tenors. With this, its one-year MCLR will come down to 8.25 percent from 8.40 percent per annum. HDFC Bank, another big lender, cut its lending rates by 10 bps a day before the RBI action probably preempting the move. Since April, SBI has cut lending rates by 30 bps. [caption id=“attachment_4495283” align=“alignleft” width=“380”] Representational image. Reuters.[/caption] More banks are likely to follow suit in the coming days as market leaders have set the trend. Is the tide turning in favour of customers finally? Not really. Consider this: Ever since the monetary policy committee (MPC) commenced this round of rate cut cycle in February this year, the repo rate, at which the RBI lends short-term funds to banks, has come down by a good 110 bps. Compared with this, the benchmark lending rates of banks have come down by just 15-30 bps. That means, banks have room for further reduction of at least 80 bps in their lending rates if these entities choose to pass on the full benefit of the RBI rate cuts to the end-borrower. But banks are protective of their margins and are unlikely to oblige. A minor cut in lending rates, say 10-15 bps, won’t make much difference to the EMI burden of the common man beyond a few hundred rupees. For instance, take SBI’s case. As mentioned above, it cut lending rates by a cumulative 30 bps since April. If the EMI on a Rs 20 lakh home loan was Rs 17,420 at a rate of 8.55 percent and for 20 years tenure then, post the lending rate cut, the same EMI stands at Rs17,041 or a reduction of just Rs 379. Is that a big relief for a home loan borrower? On the other hand, savers are losing out big—both in banks and outside. That’s true especially for small savers. Banks have been slashing the interest rates on term deposits at a much faster rate. Now, consider the trend in deposit rates between last year and this year. For up to 5 year period tenure deposits, rates have fallen by up to 25 bps. If the saver was getting an interest of Rs 9,06,000 on a Rs 20 lakh, 5-year fixed deposit then, now he is getting Rs 8,70,000 or a difference of Rs 36,000. With bank deposits turning unattractive, it appears that small saving schemes are better option for savers. For example, five-year post office deposits are giving a rate of 7.7 percent while the same maturity bank deposit will yield less than 7 percent for most banks. But even small deposit rates are inching down. In June, the government cut interest rates on small savings schemes by one percent. Public Provident Fund (PPF) and National Savings Certificate (NSC) now give 7.9 percent per annum while Kisan Vikas Patra (KVP) will yield 7.6 percent. What do these numbers tell us? The reduction in 35 bps in the RBI rate does not give much reason to rejoice for individual borrowers. They will have a reason only if banks reduce their lending rates by a much bigger margin translating the full benefit of the RBI rate cut to the common man. A few hundred rupees cut in monthly EMIs is not a solid reason for anyone to make a buying decision. On the other side, savers are being punished by banks. For most savers in banks, post-tax earnings on a bank FD is pittance. (Data contributed by Kishor Kadam)