RBI's Makar Sankranti/Pongal gift for retail borrowers

While the repo rate cut will lead to lower loan rates, depositors will benefit from low inflation even if deposit rates fall

Retail borrowers got an unexpected gift on the occasion of Makar Sankranti and Pongal when the Reserve Bank of India announced a 25 basis point cut in repo rates, from 8% to 7.75%. This is likely to translate into a cut in both lending and deposit rates, said bankers.

While cheaper home and auto loan rates will bring cheer to retail borrowers, lower inflation ensures that the real return from bank fixed deposits will be positive, even if banks cut their fixed deposit rates.

After the RBI announcement United Bank of India was the first to announce a cut in its Base Rat to 10% from 10.25%. But P Srinivas, MD and CEO of the bank said there are no immediate plans to cut deposit rates, since its rates are already one of the lowest in the industry.

Jairam Sridharan, President and head retail lending Axis Bank said banks will reduce lending and deposit rates following the cut by RBI, but the transmission could take time. "We need to evaluate the immediate impact on our policies. While the incremental funds will come in at lower rates, banks will need to how much of their current funds are borrowed at higher rates and how soon they can extinguish that,'' he said.

An immediate cut in deposit rates seems unlikely since many banks have reduced deposit rates over the last couple of months, said Rajesh Cheruvu, Chief Investment Officer, RBS Private Banking. Besides, given the improved liquidity conditions, banks are not under pressure to raise fresh funds.

"We may not see a rate cut by banks immediately. But the RBI move shows the policy rate trajectory. With inflation and food prices coming down, momentum was building up for a rate cut,'' he said.

Some banks that had cut deposit rates in December include State Bank of India, ICICI Bank, Axis Bank and IDBI Bank. Rates on one-year bank fixed deposits are between 8- 9%, for most banks. With Consumer Price Index inflation at 5%, this means real returns of 3-4% on bank FDs. "Retail investors should lock into bank FDs, if they have not done so far. Since inflation is low, the real return from bank FDs is significant for depositors,'' Sridharan said.

Investors can also look at long duration income funds, which are likely to give 11-11.5%. Even equities will give good returns in 2015, on the back of improved earnings and a likely ratings upgrade for India, if the government sticks to its plan of fiscal discipline, Cheruvu said.

Vidya Bala, Head - Mutual Funds Research, FundsIndia.com also said that the current rate cut is a more significant one for the equity market.

"With deposit rates already being cut and more to come, it is a matter of time before borrowing rates too, are cut. This could, with some lag, aid credit growth and help companies plan their investment/capex activities. A pick up in corporate earnings growth, in a few quarters from now, appears likely - backed by reforms, a congenial climate for investment and an improved demand scenario. This could trigger another leg of re-rating for companies in sectors that benefit both from lower interest cost and lower input costs (coming from lower commodity prices).

Retail credit has been muted so far. But the easing of inflation may provide some relief to borrowers. "If disposable incomes rise, I expect retail credit to pick up in the second half of the calendar year,'' Cheruvu added.