Continuing to deliver good news for borrowers, the Reserve Bank of India (RBI) has announced another repo rate cut by 25 basis points (bps). This is the third time in a row that the central bank has cut key rates this calendar year. Borrowers can hope for more rate cuts in the future as monetary policy stance has been changed from neutral to accomodative.
Highlights
- In the previous monetary policy reviews, held in February and April 2019, RBI reduced the key policy rates by 25 bps each time.
- This is good news for borrowers as EMIs are likely to go down assuming banks will pass on the benefit of the rate cut.
- However, this is bad news, especially for senior citizens dependant on income from fixed income instruments.
However, this is bad news, especially for senior citizens dependant on income from fixed income instruments. This is because interest rates on fixed deposits depend on several other factors such as liquidity in the economy and interest rates of post office saving schemes apart from RBI’s repo rate.
Impact of the rate cut
Post the policy announcement, the repo rate stands at 5.75 per cent down from 6.00 per cent. Similarly, reverse repo rate has also been reduced to 5.50 per cent from 5.75 per cent.
In the previous monetary policy reviews, held in February and April 2019, RBI reduced the key policy rates by 25 bps each time. In the calendar year, the central bank has reduced the rates by 75 bps in total. One basis point is equal to one hundredth part of percentage.
This is good news for borrowers as EMIs (equated monthly instalments) are likely to go down assuming banks will pass on the benefit of the rate cut.
“It’s our expectation that as we go forward there will be higher transmission and then there will be faster transmission as well. This transmission will find its impact on individual consumer loans, consumer durable loans and two wheeler loans as well,” Shaktikanta Das, RBI governor said.
Now, assuming that banks also pass on today’s reduction in repo rate by RBI, here is an example of how your home loan equated monthly instalments (EMIs) are likely to be impacted:
| Loan Amount (₹) | 3000000 |
| Tenure (Years) | 20 |
| Current Interest Rate (%) | 8.6 |
| Current EMI (₹) | 26,225 |
| New Interest rate (%) | 8.35 |
| New EMI (₹) | 25,751 |
| Cut in EMI (₹) | 474 |
Interest rate taken from SBI website for Rs 30 lakh loan for salaried class, male borrowers.
Assuming banks pass on the entire rate cut from RBI in tandem.
According to a Kotak Institutional Equities report, average fresh lending rates have decreased by 10 bps to 9.7 percent a month-on-month basis in March 2019. This has come after the central bank reduced the repo rate by 25 bps in its February monetary policy review. Average lending rates of public sector banks declined by 20 bps on a monthly basis whereas private banks reduced the rates by 5 bps, as per the Kotak report dated May 26.
The country’s largest bank, State Bank of India (SBI), reduced its MCLR (marginal cost of funds based lending rate) by 5 bps across all tenors with effect from May 10, 2019. However, base rate at 9.95 per cent and benchmark prime lending rate at 13.80 has been kept unchanged since March.
From May 1, SBI has also linked interest rate on savings account with balances above Rs 1 lakh to repo rate. The interest rate on these savings account will be 2.75 per cent below RBI’s repo rate. Thus, these savings account holders will be earning less interest on their savings.
On the other hand, SBI borrowers having cash credit accounts, overdraft accounts with limit over Rs 1 lakh will be paying interest at the rate of 2.25 per cent plus repo rate. The reduction in repo rate means they will pay lower interest rate on their borrowings.
Gaurav Gupta, Co-Founder & CEO, Myloancare.in says, “RBI’s third consecutive 25 bps repo rate cut is driven by benign inflation and fears of an industrial slowdown. It is important to note that the transmission of even the first two cuts has been minimal for retail borrowers. In fact, most leading banks have taken a slight increase in the home loan and personal loan rates over the last three months. In MyLoanCare view, there are structural issues (both liquidity and asset quality) emanating from NBFC liquidity crisis, which seem to be spilling over to debt mutual funds and these severely restricts the ability of banks to pass on policy rate cuts to the consumers. The industrial slowdown has its origin in real estate and infrastructure crisis and a rate cut, while helpful, will have to be combined with a policy intervention to revive the real estate and infrastructure sectors. It may be a while before the rate cut makes its way to the end borrowers.”
Here’s what different types of borrowers can do post the third consecutive rate cut.
For new borrowers
RBI deferred its plan of linking loans to an external benchmark instead of the existing linkage to MCLR. Therefore, as a new borrower, loans will continue to carry interest rates linked to MCLR. As the central bank has cut the rate for the third time, it is likely that banks will also lower their MCLR.
You can also avail the benefit of credit subsidy available under the Pradhan Mantri Awas Yojana (PMAY). Middle income group – I (MIG -I) with household income between Rs 6 lakh and Rs 12 lakh can avail interest subsidy of 4 per cent whereas middle income group – II (MIG -II) with household income between Rs 12 lakh and 18 lakh will get interest subsidy of 3 per cent.
The benefit of interest subsidy for both the groups is available till March 31, 2020.
Existing borrowers
A) With loans linked to MCLR
Although the three repo rate cuts this year is good news for borrowers, understandably you will only see a decline in your EMIs after your bank lowers its MCLR. Further, the reduction in MCLR will result in lower EMIs only when the reset date of your home loan arrives.
Usually, a bank offers loan with reset period of six months or one year. On the reset date, your future EMIs will be calculated on the basis of the prevailing interest rate (bank’s MCLR plus margin of the bank) on that date.
To further reduce your home loan burden, you can prepay it. Click here to know how you can prepay it.
B) With loans linked to base rate or BPLR
If your home loan is still linked to base rate or BPLR, then you should consider switching to an MCLR-linked loan. This is because MCLR offers better transparency and transmission of policy rates in comparison with base rate and BPLR rates, as per industry experts.
As per RBI guidelines, all the loans disbursed on or after April 1, 2016 are to be linked with MCLR. Borrowers who took loans prior to April 1, 2016 can either switch to MCLR with the same bank or transfer to another bank.
Source : ET
