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RBI rate cut will help only if banks cut lending rates

As widely anticipated, India's RBI has once again reduced its key lending rate by 25 basis point. The lending rate now stands at 5.75, and this is the third consecutive rate cut since February 2019. Even though the Indian economy is perceived to be in the grips of a slowdown, the markets are quite bullish on Modi's return to power with a thumping majority. This may eventually make the fiscal deficit worse.
As for the housing sector, this rate cut may send only send out positive notional signals - its real gain can be realised only if banks pass on the benefits to actual homebuyer borrowers. The apex bank will need to ensure that this actually happens at the ground level since there has been little evidence of such transmissions in the recent past.
In the current scenario, things look quite bleak. The reason why most banks are not really able to pass on the benefits of RBI's rate cuts is that their deposit rates are still very high. This ultimately makes reducing interest rates to borrowers unfeasible.
Nevertheless, this rate cut will have an on the housing market if and when banks reduce their lending rates to homebuyers.
- Arun Chitnis