Know the Impact of the Current Repo Rate on Investors and Borrowers
In terms of economic reform in India, 2019 brought with it many developments, especially in case of the RBI’s repo rate. Last year alone, the Reserve Bank of India’s Monetary Policy Committee issued 5 repo rate cuts, totalling to 135bps, bringing the current repo rate down to 5.15%. Further, in the latest monetary policy review conducted in December 2019, the Committee did not make any changes to the rate, an unexpected move as experts predicted a final repo rate cut in 2019. As an investor or borrower, you may wonder about the impact these changes have on your personal finances. For instance, while the intention for the cuts was to drive private consumption in India, investors may tell another tale.
In order to better understand the impact of the current RBI repo rate for both, investors and borrowers in detail, read on.
Impact of the current repo rate for investors
Considering the fact that the present repo rate is a result of 5 consecutive cuts, yield from deposit investments has gone down a few notches. This is because institutions tend to reduce both lending and deposit rates when a repo rate cut is issued. In fact, new fixed deposit investors were hit the hardest as the 135bps cut from February 2019 isn’t favourable.
Impact of the current repo rate for existing borrowers
As an existing borrower, your floating rate home loan may be linked to either an external benchmark or either the Marginal Cost of Lending Rate (MCLR) or the Benchmark Prime Lending Rate (BPLR). The impact of the current repo rate for these varies and here’s a detailed take to help you understand it better.
For home loans linked to an external benchmark
The interest rate for these loans are linked to any of 4 benchmarks: the RBI’s repo rate, Government of India’s 91-days treasury bill yield, Government of India’s 182-days treasury bill yield or any other benchmark market interest rate as per FBIL. With external-benchmark floating rate bank loans, you can expect greater transparency, quicker resets, and faster transmission of the current repo rate.
For home loans linked to the MCLR
As banks have their own MCLR, which is based on the prevailing rate issued by the Central Bank, the impact of a repo rate cut will only be felt when your home loan is due for reset, and according to your bank’s policies. Since banks usually offer home loans with reset periods every 6 or 12 months, your loan won’t undergo any interest revisions until that day.
However, multiple successive repo rate cuts is good news and you can expect your EMI outgo to decrease when the issuing bank adopts a revised MCLR rate.
For home loans linked to BPLR
As BPLR is calculated as per the base rate set by the RBI, the impact of a repo rate change is unclear. However, due to non-transparency in dealings among other factors, it is advised to switch over to an offering with external benchmarking for better transmission of policy rates.
Impact of the current repo rate for new borrowers
As per the circular issued by the RBI in September 2019, all banks will now issue floating rate home loans linked to any of the above-mentioned external benchmarks. This way, should the current repo rate drop, you would enjoy an interest revision within 3 months from the cut.
However, when it comes to borrowing affordably, irrespective of RBI repo rate transmissions, its key to avail a home loan from a leading lender that is known to offer a competitive interest rate. A prime example is the Bajaj Finserv Home Loan that gives you access to a sanction of up to Rs.3.5 crore on cost-effective terms. You can use this sanction to comfortably purchase the home of your dreams and also extract value from the additional features on offer. These include property search services that grant access to expert counselling to assist with everything from property identification to legal aid. Further, this loan is also fairly easy to qualify for, has a minimal requirement for documentation and allows you to repay your loan over a tenor of up to 30 years.
So, take advantage of the current repo rate and get access to the funding you need with ease.