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Home loans to get cheaper once again courtesy RBI’s repo rate cut

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Home loans to get cheaper once again courtesy RBI’s repo rate cut

The Reserve Bank of India (RBI) was widely expected to announce a 4th consecutive cut in repo rates and the script has played out exactly as anticipated once the MPC (Monetary Policy Committee) released its decisions. All 6 members of the committee voted for the cut in repo rates which is the fourth such consecutive reduction as mentioned earlier.

The repo rate has been cut by 35 basis points to stand at 5.40%. The MPC has also stated that inflation levels are anticipated to remain well within its target at the moment. According to the apex bank’s statement, economic growth continues to be sluggish since the last monetary policy and hence with trade tensions increasing and chances of a widespread slowdown globally, private consumption needs to be boosted which is the mainstay for overall aggregate demand along with investments. Earlier rate cuts are now increasingly being transmitted to customers as per the RBI but there is still breathing space for another policy measure which is this new cut in the repo rate.

What the RBI Governor felt about the rate cut

Shaktikanta Das, the RBI Governor, opined that the higher cut in repo rates was a balanced measure taking into account latest developments globally and also in the domestic market ecosystem. Das stated that a reduction in the repo rate by 0.25 percentage points as had been done three times in 2019 would not have been enough while a reduction of 0.50 percentage points would have been too much.

He has also stated that the apex bank has taken a pre-emptive stance with regard to policy action relating to the repo rate with a view towards ensuring ample liquidity into the entire financial system. He also opined that the earlier rate cuts were being better transmitted to customers and also remained confident about there being further cuts in rates over the next few years.

Key aspects worth highlighting

Here are some of the major aspects which have to be highlighted in this context:

  • Repo rate cut by 35 basis points to stand at 5.40%.
  • Reverse repo rate changes to 5.15%.
  • MSF (marginal standing facility) rate and the bank rate are at 5.65%.
  • Accommodative policy stance maintained by RBI once again.
  • Retail inflation prediction kept within RBI target of around 3.5-3.7% for H2 FY2019-20.
  • 4 MPC members voted in favor of repo rate cut of 35 basis points while 2 members voted for a cut of 25 basis points.
  • Next MPC statement will be released on the 4th of October, 2019.

SBI immediately cuts lending rates

State Bank of India (SBI), the biggest lender in the country, has immediately reduced its lending rates within a few hours of the cut in repo rates by the RBI. Several other banks may be lowering rates of interest soon as per reports. SBI has already confirmed this reduction in MCLR (marginal cost of funds based lending rate) to the tune of 15 basis points for all its tenors. These rates will be enforced from the 10th of August, 2019.

Home loans tied to MCLR rates are now cheaper for customers by 35 basis points ever since the 10th of April, 2019 as per SBI. The bank’s 1-year MCLR is now at 8.25% per annum as compared to 8.40% per annum previously. This is the 4th MCLR reduction in succession for SBI in the current financial year. From the 1st of July, 2019, SBI had already started giving customers an option to choose a home loan tied to the repo rate. The rate of interest on this home loan will automatically change whenever the repo rate is changed by the RBI.

How will borrowers be impacted?

Like the earlier three cuts in repo rates, home loan borrowers will be positively impacted by the latest repo rate cut. Repo rate is the interest rate at which funds are borrowed from the RBI by Indian banks. Whenever the repo rate is slashed, there is a lower cost of funds for these banks as a result, thereby enabling lower rates of interest on loans. MCLR of a bank will keep falling with a repo rate reduction and this will lead to a fall in home loan interest rates.

Here are some of the key things to remember in this regard:

  • Lending rates are expected to fall across multiple banks especially after SBI’s instant MCLR reduction.
  • This will benefit new and existing home loan customers alike since the interest outgo and EMIs will be lower.
  • With the latest cut in the repo rate, the RBI has reduced the key policy rate by a whopping 110 basis points in recent times.
  • RBI has also reported that transmission of cuts in the repo rate has improved steadily since the last meeting of the MPC. Banks have lowered the weighted average lending rate or WALR by 29 basis points between February and June this year.
  • HDFC Bank has also cut lending rates by 10 basis points for existing and new borrowers alike.
  • With faster passing on of benefits by banks, home loan borrowers will thus benefit from reduced EMIs and interest costs.

A Case Study

Suppose the current repo rate cut is passed on swiftly by banks to the customer like in the case of SBI. Here is a case study which demonstrates how your home loan EMIs should be affected.

Suppose you have taken a home loan of Rs. 40 lakh with a tenor of 20 years. The present rate of interest is 8.50% and the new rate of interest will be 8.15%. The previous EMI was Rs. 34,713. However, under the new rates, your EMI will come down to Rs. 33,832 which indicates savings of Rs. 881 approximately every month.

More importantly, in the new regime, for a loan of Rs. 40 lakh, your overall interest outgo stands at Rs. 41,19,675 while in the earlier regime it stood at Rs. 43,31,104. With the rate cut, your interest outgo reduces by a whopping Rs. 2,11,429 which is a major relief, to say the least.

This is just an indicative case study to give you an idea. It all depends on how swiftly banks follow SBI and HDFC’s lead and lower their home loan interest rates with a view towards transmitting the repo rate cut seamlessly to borrowers.

All in all, the recent repo rate cut is a major positive for all those who have home loans and those planning to apply soon. This should also be good for the real estate sector in terms of spurring demand, particularly in the affordable housing segment where the benefits of lower interest rates combine with CLSS/PMAY subsidies.

 

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