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alisha | 15 Apr 2019

The Reduction Of Repo Rate To 6% By RBI Makes The Loans Cheaper

The Reduction Of Repo Rate To 6% By RBI Makes The Loans Cheaper

The monetary policy committee of the Reserve Bank of India (RBI) cut the benchmark lending rate by 25 basis points on 4th April 2019. It now stands at 6%, resulting in the loans getting cheaper. The four members of the committee have voted for the rate cut. 

Now, the home loan EMI is likely to reduce. After the announcement, Finance Minister Arun Jaitley said, "The government wants interest rate regime lowered to a level where paying equated monthly installments (EMIs) for home loans will be cheaper than paying rents".

On the other hand, economists expressed there is still scope for a further rate reduction. The Economist at DBS Bank, Radhika Rao said, “We expect another rate cut, with June as our base case. An argument for the cut to be delayed to August is equally strong if the RBI sees reason in factoring in the full-year budget due in July and awaits a clearer picture on monsoon developments".

Besides the loans, how is the rate cut going to impact your other investments?

Loans to get cheaper, but with a possibility of taking some time. The central bank holds a record of lagging the monetary transmission while announcing rate cuts as well as the marginal output in the quantum of rate cuts. Most banks link their loans to the one-year marginal cost of funds based lending rate (MCLR). “As long as deposits don’t grow, transmission of the rate will be difficult. It will be difficult for the entire rate cut to get transmitted. They have cut repo-rate, but the cost of fund is hardly going down," said Hatim Broachwala, analysts at IDBI Capital. Hence, change in loan rates is bound to happen with marginal impact. Better opt for floating rate loans and avoid loans on fixed rates.

Deposit rates will remain unchanged. The small savings deposit offering around 8% returns and bank deposits in the 6.50% range at present fall in the same category. Hence, the pressure doesn't allow banks to ease rates. The current rates will remain the same for some time and are expected to fall eventually. Experts are also expecting to see the revision of rates post elections.

Also, no change will be seen in the ultra-short-term and short term debt fund. The recent policy announcement has left the bond market in an unhappy note. The head-fixed income, Axis Mutual Fund, R Sivakumar said, "From a bond market point of view, there was a general expectation of something more — either a liquidity signal or stronger signal on growth and inflation. In the absence of that and additional carve out from SLR, the demand of G-sec is expected to be reduced from the banking system. It will have an impact on the longer-end of the yield curve". Rather than planning to park your money in fixed income instruments such as debt funds, better look at short-term and ultra-short term funds. The policy announcement also had RBI allowing banks to reckon an additional 2% of G-sec within the mandatory SLR requirement.

It is advisable for a depositor to lock in at the current levels whereas floating rate loans for a new borrower. Try negotiating with the bank on the charges and the spread over the interest rate. Look at ultra-short-term and short term funds if you are investing in a debt fund.


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