Double Bonanza for Salaried Class, RBI Cuts Repo Rate After 5 Years
A lower repo rate means banks can borrow funds at a lower cost from the central bank and are expected to pass on the lower cost to the borrowers.
Mumbai: After a significant income tax relief announced in the Union Budget, India’s salaried class got another boost with the central bank’s rate setting panel--the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) on Friday cut the repo rate (the interest rate at which the central bank lends short term money to banks) by 25 basis points to 6.25 per cent.
The rate cut which comes after a gap of 5 years is expected to bring relief to borrowers, as banks are likely to lower lending rates on home loans, auto loans, education loans, and business credit.
While the new borrowers will be offered loans at lower rate, the exact date of rate cut transmission to the old borrowers would depend on the rate reset dates set by their respective lenders. Till then, they will continue to service their loan as per their existing rates.
A lower repo rate means banks can borrow funds at a lower cost from the central bank and are expected to pass on the lower cost to the borrowers.
Speaking at the Monetary Policy Press conference, RBI new governor Sanjay Malhotra said, “Around 40 per cent of the banks loan book is linked to the external benchmark-based lending rate (read loan interest rate is linked to repo rate) where the immediate impact of the rate cut will happen. However, those loans that are linked to the marginal cost-based lending rate (MCLR) the interest rate change will happen after six months.”
Since deposit rates are already fixed and many investors have locked their money in longer tenure deposits such as 5 years, the change in interest rates will take time, Malhotra explained.
So, assuming you have a home loan of Rs 50 lakh with a loan tenure of 25 years of which you have already served 5 years, the interest rate is 9 per cent which translates into a EMI of Rs 41960. Now with the cut in repo rate, your interest rate is reduced to 8.75 per cent resulting into a revised EMI of Rs 41213, translates into a saving of Rs 747 per month and Rs 8964 annually. Now suppose you choose to lower the tenure of the loan contract, your loan contract will reduce by 11 months.
Says Anil Rego, founder at Right Horizons Ltd, “Banks will offer you two options. Either to go for lower EMI or for a lower tenure. Opting for a lower tenure by keeping the EMI unchanged will save you the total interest amount and clear your loan outstanding faster. So right now with the rate cut being too small, borrowers can go for reduced tenure. But with further rate cuts, the borrower could consider choosing lower EMI option and investing the difference in Systematic Investment Plans (SIPs).”
For those such as senior citizens who prefer to invest only in fixed deposits, it is advisable to lock their money at the current higher rates offered by banks before the latter start lowering them. However, debt mutual funds, corporate bonds could offer better returns. This is the first rate cut since May 2020.