The home loan EMIs and interest rates of other consumer loans formulated by the different nationalized banks depend largely on the repo rate (i.e. the rate at which the Reserve Bank of India lends money to its scheduled banks) exacted by the Reserve bank of India. So naturally, the home loan Equated Monthly Installments and interest rates on other loans will drop down, if the Reserve Bank lowers its key rate. In fact, 85% of the bankers polled by NDTV profit are already speculating that the RBI will cut down its repo rate by 0.25 per cent in its mid quarter policy review.

After holding it steady for nine months, RBI cut down its repo rate by 0.25 per cent to 7.75 per cent in January. As expected, this initiative by RBI led other banks to immediately reduce their base rate, the rate below which they are not authorized to lend.

SBI Slashes the Lending Rates:

By 30th January 2013, only a day after the Reserve Bank decreased its key policy rates, the State Bank of India had already cut down its lending rate by 0.05 per cent. Right after this marginal decline, SBI’S minimum interest rate on consumer loans came down from 9.75 per cent to 9.70 percent by February 4th of this year.

A day before announcing its revised interest policy, Mr. Pratip Chaudhury, chairman of SBI, campaigned in favor of a 50 basis point cut in the repo rate as also in the Cash Reserve Ratio (CRR) i.e. the minimum deposit bonds that other banks should have with RBI.

SBI’s Chairman’s Analysis:

According to Mr. Chaudhury, the decrease in retail rates had generated a steeply rising demand curve, earlier. He is of the opinion that cutting down the rates further would only help in obliging greater response in the industry. The automobile industry is currently facing a slow growth rate and the sale of cars has fallen down by 27.5 per cent in February, which is probably the greatest fall during the past 12 years. Operating on a similar principle, home sales might actually increase, if interest rates keep on going down over time.