Banks expected to pass on cost savings to borrowers

Chennai - The cut in reverse purchase (repo) rate by 50 basis points by the Reserve Bank of India (RBI) Tuesday would reduce the cost of funds for banks and they are expected to pass on the same to borrowers, said a senior official of credit rating agency Fitch Ratings.

Devendra Kumar Pant, director at Fitch Ratings, said that as inflation has been controlled to a certain extent, priority has shifted to giving boost to economic growth. The policy stance was to provide greater liquidity cushion to the financial system.

"Today's 50 bps cut in repo rate is a step in this direction. RBI has said that the scope for future cut is limited; this would largely depend on how inflation and growth scenario pans out in 2012-13," Pant added.

He said the adverse shock from commodity price is low. The chances of inflation going up due to commodity prices are not high.

"Core inflation measured by non-food manufactured products in March 2012 declined to 4.7 percent although higher than RBI's comfort level of four percent is significantly lower than 8.4 percent in November 2011," he said.

Terming the reduction in repo rate as a welcome surprise, Dinesh Thakkar, chairman and managing director of Angel Broking, said: "The decline in average inflation levels by more than 150 bps (basis points) compared to the levels prevailing during most of FY11 and FY12 was clearly creating headroom for interest rates to come down and the RBI's move mirrors these macro conditions."

According to him, the bank's lending and deposit rates would inch down by 50 basis points in the coming months as lower inflation enables higher financial savings.