Boom to banking industry

The most awaited announcement from RBI came as a Makara Sankranthi gift for citizens. After a period of about 20 months, RBI has announced a rate cut in the repo rate. Citizens to be specific banks were in a hunger for such an announcement.

RBI has decided to reduce its repo rate by 25 bps to 7.75% from 8%. As per RBI, this decision was planned to take only if the inflation rate comes into control. Since the inflation rate has been controlled, the boom for banks has arrived.Still, the target for January 2016 inflation is 6%. Another rate cut can be expected if 6% target is achieved. This reduction of repo rate directed banks to reduce the base rate. Base rate is the minimum rate that each bank can lend money.

Banks base rate has been decided around 10 – 10.50 overall. Deposit rates have also cut down to manage the reduction in base rates. Reduction in interest rates gave an unexpected hike in share values of most of the banks. Reduction in interest rates would have its effect in the private sector. There would be an increase of loans by people which will eventually lead to investments. Employment opportunities may increase which will in turn contribute the GDP and inflation.

Banks have also been allowed to take up insurance, with a motive of enhancing the banking industry. RBI has requested the bank to review the base rate every quarter and also to review the base rate calculation method every 3 years. Basically base rate calculation includes the cost of deposits and borrowings, cash reserve ratio, statutory liquidity ratio and still more. Hope interest rate cuts will reach all its bottom line.

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