New Delhi: Home loan and auto loan borrowers now have a reason to cheer as the upward trend in interest is going to reverse soon. The Reserve Bank of India in a surprise move cut its key lending rate, repo rate, by 25 basis points to 6.25%, which will translate into lower borrowing rate for lenders. It may be noted that repo rate is the rate at which RBI lends money to banks.it would be great news for loan seekers because home loan and auto loans are typically priced at a floating rate, which means whenever the repo rate is reduced by RBI, banks will gradually pass on the lower rate to borrowers. Also, the reverse will happen when repo rates go up.
However banks price their home and auto loans as a markup to their Marginal Cost of Funds based Lending Rate (MCLR), the minimum interest rate, below which a bank is not permitted to lend. As the repo rate falls banks MCLR will gradually trend lower, which will ultimately be passed on to borrowers.
The repo rate cut is welcome news for the economy as it is likely to boost lending and give a fillip to the banking sector. It may be noted that the Narendra Modi-led government wants to boost lending and lift growth as it faces elections by May. In the interim Budget announced on Feb. 1, the government doled out cash to farmers and tax cuts to middle-class families, at the cost of a wider fiscal deficit and larger borrowing.
Earlier, Economic growth fell to a worse-than-expected 7.1 percent in the July-September quarter from 8.2 percent, dragged down by slower consumer spending and farm growth, below analysts forecast for a 7.4 percent increase.
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