Reserve Bank of India's Policy Rate Cut Came as Pleasant Surprise
Banks cut lending rates
Banks were quick to react to the rate cut that the Reserve Bank of India announced on September 29. In its announcement, the RBI requested that banks pass on the benefits of lower rates to consumers.
Major private and public banks cut their lending rates following the announcement. However, the cut in lending rates was lower than the 0.50% cut in repo rates the central bank announced.
The country’s largest lender, State Bank of India (SBIN), was among the first to announce a cut of 40 basis points in its base rate to 9.3%. The base rate is the minimum rate of interest at which a bank lends to its borrowers. Andhra Bank and the Bank of India followed and cut base rates by 25 basis points each to 9.7%. New rates would be effective from October 5 onwards.
On Wednesday, state-owned lender UCO Bank cut its base rate by 25 basis points to 9.7%, while the Oriental Bank of Commerce slashed rates by 20 basis points to 9.7%.
Punjab National Bank, a lender in the public sector, reduced its base rate by 40 basis points to 9.6%, while the Bank of Baroda reduced its minimum lending rate by 35 basis points to 9.65%. IDBI Bank also cut its base rate by 25 basis points to 9.75%, which will take effect on October 5.
Axis Bank (AXS) was the first private sector bank to slash rates. The bank cut its base rate by 25 basis points to 9.5%. Larger banks like HDFC (HDB) and ICICI (IBN) are yet to announce rate cuts.
Investors looking for exposure to the growing Indian economy could invest in the iShares MSCI India ETF (INDA) or the Wisdom Tree India Earnings Fund (EPI).
Impact on margins
Reduction of base rates will likely pressure net interest margins of banks in the coming quarters. The degree to which banks cut rates in the future will determine the magnitude by which margins will be squeezed. Experts expect a reduction of 10-15 basis points in margins in the third quarter of the fiscal year ending in March 2016.
However, this margin pressure will be somewhat relaxed by increased investment income derived from an increase in the value of bond investments.
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