The government wants the interest rate regime lowered to a level where paying equated monthly instalments (EMIs) for home loans will be cheaper than paying rents, finance minister Arun Jaitley said on Thursday after the Reserve Bank of India (RBI) lowered policy rates for a second time in two months.
Commercial banks will respond to the RBI’s rate cuts and will eventually pass on the benefit of lower interest rates to customers, Jaitley said in an interview to Hindustan Times.
Banks review their Marginal Cost of funds based Lending Rate, or MCLR, the floor at which they extend loans, every month, Jaitley said. “So we will have to wait for their decision. And, I’m sure, over a period of time it gets reflected,” he added.
The central bank on Thursday reduced the repo rate, or the rate at which it lends short-term money to commercial banks, by 25 basis points, matching its February rate cut. One basis point is one-hundredth of a percentage point.
A lower interest rate regime will make borrowings cheaper, particularly for homebuyers, and generate consumer demand that will boost economic growth.
Jaitley cited an example from the years when the National Democratic Alliance (NDA) was in power under the leadership of Atal Bihari Vajpayee, whose government introduced income tax deductions attributable to interest payments on housing loans, lowering the cost of borrowing and giving a boost to housing demand.
“When Mr Vajpayee was the prime minister, if you remember, home loans had become so cheap that EMIs cost less than renting a house, I think that’s where we need to take interest rates,” he said.
Asked why banks were reluctant to pass on the benefits of policy rate cuts by the RBI to their customers, Jaitley said: “They have a formulation where they don’t do an immediate transmission, but over a period they do it. And I’m glad the governor [of RBI] said today that they are going to have a policy of transmission in consultation with banks,” he said.
The rate cut by the RBI will give a boost to the economy through higher consumption and investments, said Surendra Hiranandani, founder and director of real estate company Hiranandani Group.
“It is encouraging that the overall focus is on supporting growth and infusing liquidity in the system. Hopefully, consecutive rate cuts will lead to lower lending rates which augurs well for the real estate sector as it will bring back fence sitters in the market. It is now up to the banks to pass on these cuts and ensure that the common man reaps the benefit of this move,” he said.
It is necessary to resurrect consumer demand and boost economic growth in India before a synchronous downturn in advanced economies heightens market volatility, said Khushru Jijina, managing director of Piramal Capital and Housing Finance.
“Today’s rate cut and moderation in liquidity coverage ratio coupled with recent instances of liquidity injections indicate that RBI is cognizant of these risks. These measures would certainly help ease liquidity and improve access to cheaper credit by India Inc as well as retail consumers,” he said.