Mumbai: Home, auto and corporate loans are likely to become cheaper as the Reserve Bank on Tuesday slashed the short term lending rate sharply by 0.50 percent to 8 percent, signalling banks to cut rates.
The reduced cost of borrowing is expected to be passed on partially by banks to borrowers in the form of lower interest rate on loans.
"The RBI has taken a bold step. The reduction in the policy rate by RBI would translate into lowering of interest rates. Base rates are expected to come down by about 25 basis points," Canara Bank Executive Director A K Gupta told.
Base rate is the minimum lending rate below which banks can't lend. Lowering that would mean reduction in all loans.
To bring down the cost of borrowings for banks, RBI slashed short term lending (repo) rate after a gap of 3 years.
Besides, RBI's move to ease liquidity situation would result in the infusion of much needed cash flows into the banking system, he said.
In the Annual Monetary Policy, 2012-13, RBI doubled borrowings under the Marginal Standing Facility for banks to 2 percent of their deposits with immediate effect to ease liquidity. It also permitted banks to borrow under the MSF even if they have excess government securities holdings.
IDBI Bank Executive Director R K Bansal said the monetary action will help boost growth and RBI has given a strong message to cut interest rates.
He said IDBI Bank would take a view on the interest rate at its Asset Liability Committee (Alco) meeting in the next few days.
According to Indian Overseas Bank Executive Director A K Bansal, both deposit and advances rates would come down.

Base rate of banks vary from 10 percent to 12 percent, while home loan rates are between 10.75 percent and 14 percent. Auto loans range from 12 percent to 15 percent.
Bansal said there would be reduction in fixed deposits rates, followed by cut in lending rates.
On the quantum of reduction, he said Alco of the bank would take a call taking into consideration all the aspect.
Terming the policy action as "pleasant surprise", Dena Bank Executive Director A K Dutt said the reduction in RBI is more than what was being expected in the market. It was widely anticipated that there would be a cut of 0.25 percent in the policy rate.
"Since the cost of raising fund has come down, there would some softening of interest rates. When and how much would depend on bank to bank," Dutt said.
There would be reduction in fixed deposit rates as well, he added.

Terming the RBI's decision as "the right move", state-run Bank of India's chairman and managing director Alok K Misra said the rate cut indicates that RBI has now given priority to growth, keeping a close watch on inflation.
"The repo rate cut will be a sentiment-booster for the economy and is expected to address the concerns of different quarters. Increased borrowing limits (doubling of the MSF to 2 percent) will further address the liquidity concerns.
"The apex bank has rightly shown its concern on the inflation and fiscal consolidation fronts. The guidance indicates that further easing of policy measures may be constrained by these critical factors. Today's policy statement, while recognising the challenges of fiscal consolidation and inflationary pressures, is preparing for a growth," Misra concluded.
Federal Bank managing director and chief executive, Shyam Srinivasan, said the policy stance has given a strong signal and a much-needed impetus to the market.
"This front-ending of interest rate cut is a bold move that should see confidence returning to the markets and lead to the virtuous investment/capital formation cycle. It should provide the right fillip to the industry for going ahead with projects that were stuck on the drawing board," he said.
On the future rate cuts, Srinivasan said, "Though RBI has said that the ability to further cut rates is low, we believe the year could see at least two more rounds of rate cuts. Depending on the macroeconomic variables, there can be a cut in CRR as well.
"Though the challenges on the domestic and overseas front remain, I believe that appropriate policy measures can reignite the growth cycle.  The deposit and lending rates will come down," Srinivasan said.
Jammu & Kashmir Bank chairman, Mushtaq Ahmad, said his bank will bring down the lending rate, and the policy initiative will help banks generate volumes, customer base and remain competitive.
"We will be happy to pass on the benefit to our borrowers. Though seemed temporary, the initiative is an act of re-balancing towards checking inflation," he said.