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Irrespective of seeing a repo rate cut, we may not see reduction in the consumer loan rates; since, banks are still paying higher to depositors. Although, banking fraternity is satisfied the way cuts in repo rates are being done, but banks would not be able to cut lending rates till CRR (Cash Reserve Ratio) rate also cut. Cash Reserve Ratio is the rate at which RBI lends to banks.
Why Lending Rates Will Not Come Down In Near Future..?
Currently, banks do not have excess cash to lend to borrowers. Thus, they are compelled to provide higher interest rates to depositors, so that they receive higher inflow of deposits, that could be used for lending to borrowers.
Now, if a cut is introduced in the reserve ratio, this will release much needed cash for the banks for further lending. Since, in this case, as there is a lower cost of funds; this will in turn reduce the total cost of funds for the banks. Hence, then only can the banks pass on the benefit to borrowers.
Another way out for reducing lending rates would be sharp reduction in the deposit rates. But, this step can not be implemented in current circumstances as the deposit mobilisation has been sluggish.
