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Is your home loan, car loan or consumer loan linked to the base rate regime? If yes, then you have a reason to cheer. IDBI Bank, a public lender, has cut its base rate by 10-basis points to 9.65% (100 basis points=1% point). Previously, the base rate of the bank was 9.75%. The development follows the softening of the lending rate by Axis Bank, which cut its base rate by 10 basis points to 9.75% a week ago. India’s biggest bank by assets State Bank of India (SBI), and the largest one in terms of market capitalisation, HDFC Bank, have already lowered their base rate. These rate cuts are just the perfect setting for people to save for the long festive season starting from August.
Why lending rates falling?
You could expect an announcement from other banks and financial institutions to slash their lending rates soon as the 10-year benchmark gilt yield hits a 38-month low of 7.18% buoyed by strong buying from institutional investors on 28th July, 2016. Foreign Institutional Investors (FIIs) bought Indian debt of over $1 billion so far in July, with gilts accounting for the majority of the investment, as per the Securities and Exchange Board of India (SEBI). The inflows reverse the trend of outflows witnessed in the previous two months. The net outflows were recorded to be $922 million and $656 million in June and May, respectively.
As 10-year benchmark yield is a key criterion for banks to fix their interest rates, bond market players expect a cheaper loan offering in a couple of months from here. Moreover, the push from the Reserve Bank of India (RBI) to shore up the liquidity in the banking system in the last few months has also prompted the likes of IDBI Bank and a few others to lower their interest rates. The RBI has pumped in nearly Rs 80,000 crores into the system via OMO. The liquidity also got a boost from the US Federal Reserve’s decision to maintain status quo on rates earlier this week. When the liquidity improves and the short-term rates fall, then it becomes easy for banks and other financial institutions to offer cheaper loan to the customers.