In an unexpected move, the Reserve Bank of India (RBI) on Wednesday cut the repo and reverse repo rates by 50 basis points each. With that, the repo rate stands lowered to 5% and reverse repo to 3.5%, an all-time low and on a par with savings account rates.

The repo is the rate at which banks borrow funds from the RBI, while reverse repo is the rate at which banks park surplus funds with the central bank. Lower exports, falling industrial production and disappointing GDP numbers were reasons the central bank gave while urging banks to continue funding "creditworthy enterprises."

WILL LENDING RATES FALL? Only a bit, because of banks' inability to reduce deposit rates, which are now between 7.5% and 8.5%. Any further reduction in deposit rates will make the product unattractive compared with government savings schemes which offer around 8%. So banks may cut deposit rates and PLRs by 50 basis points at best, said analysts. They don't expect much benefits for the retail segment, though SMEs will gain.

MARGIN HEAT FOR BANKS Despite falling gilt yields providing some respite to banks, margins will come under pressure. That's because, while a lending rate cut is applicableto both new and existingloans, the deposit rate cut is only applicable for new deposits. The high-cost deposits garnered by banks in October-November of 9-12 months' tenure will only come for re-pricing after June, so there will be a mismatch. As a result, margins for the current quarter will come under pressure if PLR cut is effected immediately by banks.

SO WHEN WILL THEY CUT? Though some bankers indicated that they may go for a PLR cut in 7-10 days, others feel the need for new rates from April 1 or from the next quarter.

YIELDS WILL FALL — JUST Anything unexpected is positive for bonds and this too, is. Yields will drop, but muted dip because of the government borrowing plan. The market has to convince itself that the government borrowings will not be as painful. The list of gilts that RBI has offered to buy under its open market operations, marketmen said, is good and therefore positive.

IS THIS THE LIQUIDITY SIGNAL? Banks haven't been cutting rates because of liquidity fears. Now there is some assurance from Mint Road in terms of cheaper money. "Some signal was needed to be sent by RBI. I think this rate cut will trigger another round of rate cuts by banks. But going forward, I don't think RBI will be as aggressive with its rate cuts as it has been now," said Abheek Barua, chief economist at HDFC Bank.

PARKING CLOSED Bankers say the main concern of the regulator at this point is moderation in loan growth. "The regulator, by cutting the reverse repo rate to as low as 3.5%, which is also the savings bank rate, has ensured that banks will not park their excess liquidity with RBI but lend," said an official of a top state-owned bank. "Rather than parking in reverse repo, we will lend even if we get only 5% or 6%," the banker said. Pop for Sensex, but… Stocks rose around the world on Wednesday, commodity prices rallied and US treasuries fell on speculation China will broaden efforts to boost growth and US lawmakers will reach agreement on a plan to stem mortgage defaults. Back to the good times? Hardly, but RBI's move on Thursday could provide some morning pop for the Sensex. Beyond that, the rate cut also shows RBI is worried about industrial data, worried about Q4 results, and more, perhaps, about Q1 results of next fiscal.

AND NOW, IT ALL BOILS DOWN TO CONSUMER CONFIDENCE Consumer confidence. These two words have been giving central bankers across the globe sleepless nights for months now.

They have thrown money, then some more cheaper money, but the consumer just refuses to take the bait. He's shying away because he's not sure about his job, his savings, his financial security, not to mention vapourised equity wealth. And you expect him to take a loan and buy? To stoke demand on his own? The one engine that was firing the Indian economy is stalling. Guess there's little else the government or the central banks can do but make money cheaper and hope for the best.

INFLATION BOTTOMING BY JUNE With fiscal stimulus options not available due to the election code of conduct in place, the RBI may have been armtwisted to provide some monetary stimulus, said a banker who did not wish to be named. But, more importantly, the stage seems to be getting set for inflation bottoming out by June, said Haseeb Drabu, chairman of Jammu & Kashmir Bank. "You'll have to factor in the Rs 3,80,000 crore fiscal deficit in the June budget. You have not factored in the cost of farm-loan waiver, the pay commission payout. It'll all come in a torrent then," he said

PM'S ADVISOR NOT AMUSED Prime Minister's Economic Advisory Council chairman Suresh Tendulkar said cutting rates will not help the industry as banks have enough funds. "Banks are flush with liquidity... In this kind of situation, reducing the rate by RBI won't help much," Tendulkar said.