In a major decision, the Reserve Bank of India (RBI) lowered the repo rate by 25 basis points as part of its first bi-monthly meeting in April 2019. The stance of the RBI was also the same at Neutral. This is the second cut in repo rates for the current calendar year 2019 as per reports. With RBI cutting its repo rate, other banks and financial institutions may take the same route soon. The decision to lower the repo rate could equate to a welcome development for home loan borrowers across the country.
EMIs may be reduced in the retail borrowing segment in case banks transfer the rate cut benefits swiftly to their customers. RBI has now kept the repo rate at 6% as compared to 6.25% previously. The reverse repo rate is now at 5.75% while it was 6% previously. On the 7th of February, 2019, the RBI had reduced the repo rate by 25 basis points. As a result, for 2019, the repo rate has been reduced by a handsome 50 basis points by the RBI and banks may be lowering home loan and other loan rates soon as per reports.
The RBI had issued a statement called the Statement on Development and Regulatory Policies on the 6th of December, 2018, where it had directed Indian banks to start the usage of external benchmarks for disbursal of new retail/personal loans on floating rates with effect from 1st April, 2019. However, this decision has been kept on hold for some time as per the latest announcement from the RBI. According to experts, the cut in the repo rate by 25 basis points will naturally spur banks to follow suit in terms of lowering interest rates on home loans. However, the percentage of reduction in home loan interest rates will naturally be dependent on factors like the operational costs and deposit costs of the banks. These are taken into account while working out the MCLR and they will impact the overall rate cut across financial institutions according to experts.
State Bank of India (SBI) has already confirmed its blueprint of connecting the interest rate for all savings accounts to the repo rate along with rates on short-term loans disbursed to customers. These new regulations will be implemented from the 1st of May, 2019 and hence savings accounts with balance more than Rs. 1 lakh and overdrafts, cash credit accounts and short-term loans will be tied to the repo rate at SBI. As a result, savings accounts will be drawing interest which is lower than the repo rate by 2.75% and cash credit accounts and overdrafts will have rates of interest equal to the country’s repo rate with an added 2.25% as the spread according to reports.
Impact of repo rate reduction
In case of existing home loan customers who have home loans tied to the MCLR rate, there will naturally be an impact once the bank lowers its own MCLR. Additionally, the benefits of a lowered rate will only be applicable for the existing customer once the next date arrives for resetting the interest rate on the home loan. Reset periods of 1 year or 6 months are mostly offered by banks in India for home loans. The reset date will lead to the re-working of future EMIs based on the applicable MCLR at the time. The interest rate will thus be reset accordingly and your EMIs will be lowered if the repo rate stays low at the time.
Those who have home loans linked to the BPLR (benchmark prime lending rate) or the base rate should certainly think of shifting to the MCLR system for their loans. They may even consider shifting to an external benchmark system in case this is enabled by their respective banks. MCLR and the new regime based on external benchmarks are more transparent options when it comes to swifter transfer of cuts in key policy rates. Those who are new customers for banks will naturally benefit from lower MCLR once banks reduce the same when they apply for home loans in the present scenario. New borrowers awaiting an external benchmark based mechanism may have to be patient for some more time as the RBI has not yet confirmed the regulations for the same.
All bank loans that have been offered after the 1st of April, 2016, will have to be tied to the MCLR system as per the earlier guideline. Home loan borrowers should also look into the advantages that they can get under the PMAY (Pradhan Mantri Awas Yojana) which offers subsidies on the basis of one’s annual income. There are of course certain eligibility guidelines that you have to adhere to in this regard. The middle income group applicants may avail of the subsidies till the 31st of March, 2020, as per reports. Experts had forecasted a cut in repo rates by the RBI on account of slowing economic growth across the country, balanced inflation and softer growth worldwide.
Some experts had forecasted a repo rate reduction by 25 basis points this month since inflation figures have been seen at comfortable levels as far as the RBI (Reserve Bank of India) is concerned over a period of 7-8 months. Inflation levels should remain at similar levels over the short-term and hence this repo rate cut according to these experts. All in all, the latest repo rate cut will eventually benefit both new and existing home loan customers.