The Reserve Bank of India (RBI) has been trending for quite some time now and with good reason! Yes, even more than the usual trending phenomenons like Tiktok, Justin Bieber and the previous trailblazers like Dhinchak Pooja! Finding this unusual? The RBI’s sudden social media popularity has been driven by back to back repo rate cuts, the latest of which came just sometime earlier. In fact, the RBI is now being called by many as the Shahenshah of the masses who are burdened with home loan repayments.
The MPC (Monetary Policy Committee) of the RBI, spearheaded by its Governor Shaktikanta Das, enabled the lowering of the repo rate to the tune of 25 basis points, making it come down to 6% from 6.25% previously. This is the second such repo rate cut in succession and this means greater relief for home loan and car loan borrowers. Or does it? Should you be relying on the RBI repo rate cut when it comes to taking a home loan?
There are two sides to the coin
On one hand, experts feel that new borrowers may enjoy lower rates of interest on their home loans or car loans while some experts feel that existing borrowers will have to wait till their reset periods, thereby mitigating any chances of immediate relief from the policy rate cut. The entire transmission of benefits of the cut in the repo rate is dependent upon the decision (and some say willingness) of the lender to pass on the same to customers. Whenever costs of borrowing are lowered for banks in the country, they can correspondingly lower their MCLR (marginal cost of funds based lending rate) which affects loans directly.
As per reports, in the period between June and December 2017, there was a reduction in repo rate by 25 basis points and this spurred an MCLR reduction of around 23 basis points on an average. However, it’s not such that this pattern has to be repeat every year.
What you should set store by
There are quite a few aspects that you should definitely be aware of by all means. These include the following:
- Many Indian banks have already reduced the MCLR to the tune of 5-15 basis points in the recent past. As a result, these financial institutions may not be lowering their MCLR anytime soon. These include HDFC Bank, ICICI Bank, Punjab National Bank, Bank of Baroda, Union Bank of India, Kotak Mahindra Bank and YES Bank.
- You may not be getting an immediate home loan interest rate reduction to cheer about. The RBI had previously proposed last December that from the 1st of April, 2019, new floating rate based personal/retail loans would be tied to a new external benchmark like the repo rate. However, a final decision on this has not been taken yet by the apex bank.
- The immediate cut in repo rates may lead to home loan interest rates coming down slightly for new borrowers in case their financial institutions lower the MCLR in the near future or have already lowered the same sometime earlier.
The repo rate is the interest rate that is charged by the Reserve Bank of India (RBI) for lending funds to commercial banks. The repo rate going low means that banks will get funding at a cheaper rate of interest and hence they are encouraged to reduce their lending rates accordingly.
Should you rely only on the repo rate?
Experts feel that you should not be relying only on the repo rate cuts by the RBI for applying for a home loan. The home loan EMI is impacted by the MCLR (Marginal Cost of Funds Based Lending Rate) which is the minimum rate below which a bank will not be offering funding. Home loans are usually tied to 6 month or 1 year MCLRs. MCLR linked home loans thus have reset periods as mentioned earlier. As a result, any monetary policy changes including repo rate cuts and subsequent lowering of MCLR by your bank will not impact your home loan EMI until the following reset date arrives.
Overall, from August 2017, the repo rate has been maintained at largely 6% by the RBI although the increase in costs of funds for particular banks led to MCLRs increasing for a certain time period. This goes to show that it is not always that banks will drop their MCLR in tune with a repo rate cut. The rate of interest for the beleaguered banking sector may well be flat or unchanged at the moment since many banks have slashed their MCLRs previously while some may lower the same going forward. Also, you should remember that a bottom point of the entire interest rate cycle has been touched and it may reverse once again. MCLR is also not the rate at which you get funds from the bank. There is a spread added over and above to this which usually ranges between 0.25-0.5%.
As a result, instead of only relying on the RBI repo rate cut, you should make sure that you opt for a MCLR linked floating interest rate home loan. Try and opt for a financial institution which has just lowered its MCLR, thereby offering lower rates of interest for home loan borrowers. Compare interest rates and then choose where to apply provided eligibility and other aspects are in order. Instead of relying on the repo rate cut, if you’re a first-time buyer and satisfy all applicable conditions, the Pradhan Mantri Awas Yojana (PMAY) is a better bet since it offers interest subsidies.
A major transformation may be heralded into the banking sector and home loan interest rates may be coming down once the RBI finalizes the new external benchmark for loans. Until that happens, go ahead and apply for your home loan and see whether you can get the lowest possible rate of interest. Again, this is not just dependent on banks cutting their MCLR; you have to meet the eligibility criteria while having a good credit score in order to negotiate and get the lowest possible rate.