MUMBAI: Come April and the cost of taking loans for homes, cars, televisions and washing machines is likely to become cheaper, regardless of whether Reserve Bank of India Governor Raghuram Rajan cuts interest rates or not.

The switchover to the marginal cost-of-funding formula, coupled with sharp cuts in small savings rates, will force lenders to pass on the benefits to customers.

“The transmission framework is being put in place,” said Srinivas Varadarajan, head of fixed income and currencies (India) at Deutsche Bank. “This should now enable banks to bring down deposit rates. With the latest round of (public savings) rate cuts, the government has done its bit.” The government reduced interest rates by 60-130 basis points for some term deposits, public provident fund and Kisan Vikas Patra.

The quarterly revision will ensure that interest rates under small savings schemes are more dynamically related to current market rates, thereby enabling banks to move their interest rates in line with current money market rates, the finance ministry said on March 18.

According to Varadarajan, there are three elements of this structure – calibrating public savings rates to the market, the marginal cost of lending and changes to the liquidity framework. The RBI has mandated banks that all rupee loans should be priced with reference to the Marginal Cost of Funds-based Lending Rate (MCLR).

Lenders until now mostly followed the average cost of deposits formula, while MCLR brings down the cost of deposits faster in a falling-interest rate regime. This, in turn, gives lenders leeway to cut lending rates. “Obviously, the deposit rate cut has to precede the lending rate cut,” said Rajnish Kumar, a managing director at State Bank of India.

“As per the formula, unless you determine the marginal cost of deposit, you cannot arrive at the marginal cost of lending rate.” The MCLR formula calculations are yet to be finalised in most banks.

No lender has arrived at a figure or a fool-proof methodology, bankers said. “Bond yields will now come down by about 25 bps in the next three to six months, leading to lower corporate borrowing costs,” said Badrish Kulhalli, fund manager – fixed income at HDFC Standard Life. “Small savings rates have been quite sticky and the cut in these rates signals a lower interest rate regime.

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