No reason to cheer: Your EMIs may not fall despite RBI's repo rate cut today

While cutting the Reserve Bank of India’s policy rate by 25 bps to support the sagging growth, Governor Raghuram Rajan urged the banks to pass on the benefit of the rate reduction to the customers. In short, he wanted banks to cut rate in tandem. But the question is will the banks take heed? They may not immediately. At least that is what one can infer from the bankers’ comments to CNBC-TV18 soon after the rate decision. Chairman of SBI, the country’s largest bank, admitted the direction of lending rates is downwards but indicated that an immediate rate reduction is unlikely. “Our ALCO has to decide the timing of the possible reduction in the rates,” she told the TV channel adding demand for credit is yet to see a pick-up.  ALCO is the asset-liability committee that takes rate decisions of a bank. [caption id=“attachment_2274762” align=“alignleft” width=“380”]  Reuters[/caption] A senior executive of the Bank of Baroda also was of the same opinion. The executive said the 25 bps was expected. “We will wait and watch how the market behaves before we take a call on lending rates,” he told ANI. In short, banks are not at all in a hurry to cut lending rates. So your loan rates will probably continue as such for an extended period of time because Rajan has signalled the central bank would be entering a long pause on rate front as it awaits to see the impact of monsoon. One cannot, however, blame the banks. As this _Firstpost_ article says commercial banks have already taken a hit on their interest margins, which is evident from their January-March quarter earnings. Secondly, state-run banks are capital-starved. They do not have the wherewithal to fund push credit growth. In fact, Rajan himself said as much when he said banks cannot fund growth as they are inadequately capitalised. The government plans to infuse about Rs 8,000 crore in PSBs in the current financial year, much less than what was sought by banks. What has worsened the situation for the banks is the high bad loans on their books, which throttles the scope for further credit expansion for state-run banks. One should remember that some of the big banks have already cut their base rates by a quarter percentage points after Rajan put pressure on them in the last policy statement. Given all this, do not expect a major rate reduction by banks now. There is nothing much to cheer for the borrower in today’s rate cut.