RBI to infuse liquidity, good for borrowers

The Reserve Bank of India (RBI) is in the headlines again. Home loan borrowers see a glimmer of hope in the latest RBI decision . ���RBI cuts repo rate��� is the latest news making its rounds in the circles of homeowners. Is it premature to rejoice? Or has the much awaited relief for borrowers burdened under debt, finally arrived?

The RBI stated that it continuously monitors monetary and liquidity conditions to maintain domestic macroeconomic & financial stability in the context of global financial crisis. Its decision is bound to be helpful to borrowers and boosts investor confidence. The RBI���s decision is viewed as a measure to moderate inflation and ensures economic growth.

But what has slashing repo rate got to do with the immense mountain of hope that borrowers are revelling in? To comprehend this, one has to understand what repo rate essentially means. Whenever the banks have any shortage of funds they can borrow it from the RBI. Repo rate is the rate at which banks borrow money from the RBI. A reduction in the repo rate will help banks get money at a cheaper rate. When the repo rate is increased borrowing from the RBI becomes more expensive. So, reducing the repo rate implies more funds at cheaper rates with the banks and borrowers hope that the bank will part with a portion of this benefit.

Over the past few months, borrowers have noticed the RBI hiking the repo and cash reserve ratio (CRR) rates. The CRR is the proportion of reserves the commercial banks must keep with the central bank. As a consequence, liquidity is drawn out of the system. Citing RBI measures as a reason , many lenders increased the lending rates for their customers.

From a modest 7% some four years ago, home loan rates have climbed up to 13% today. Thus, the reduction in the repo rate is welcome news. The central bank on Monday cut the key interest rate by 100 basis points to eight percent in a bid to reduce the cost of borrowing for commercial banks. Over the past few days, the RBI had cut the CRR, or the minimum cash commercial banks have to retain against deposits, by 150 basis points to release some Rs 65,000 crores into the system. The step by the central bank is bound to address the problem of liquidity in the financial system.

A liquidity crisis impacts real estate prices, sending property prices to newer highs. With a serious liquidity crunch, most banks would hesitate to lend money to developers for housing project constructions. However, the current move by RBI is encouraging both to developers and borrowe r s alike. For floating rate bor rowers who are paying 12 to 13% interest on their home loans, it is time to observe how their banks react to this positive move by the RBI.