It is a commonly held perception that the interest rate is nothing but the cost of borrowing money in the market. Interest is charged for the services rendered by the lender and taking the underlying risk of offering money to the borrower. However, it is also in the interest (no puns intended) of the lender to offer money to the borrower and thereby earn good returns on the same. In the process, the wheels of the economy move on. Prevalent rates of interest are always changing. You can see that there are different types of loans and hence, there are different rates.
RBI, the country’s central bank, has cut the repo rate several times this year. Currently, the rate is 5.4%. This is a lower rate compared to what it was in 2010. RBI has reduced the policy rate by 110 basis points since January this year which paves the way forward for aggressively lowering lending rates across banks and financial institutions as well.
Why borrowers should consider this good news
This is good news for the borrowers indeed. In the same breath, one can say that banks have been slower than usual in transmitting the benefits of rate cuts to borrowers. When the easing phase was on, banks reduced their weighted average lending rates by 29 basis points. One can compare it with the 75 bps cut by RBI. SBI has also cut its marginal cost lending rate (MCLR) by 5 bps across sectors.
It is too early to predict a drastic decline in home loan EMIs and you should not be hurried into making any guesses. The reduction in EMI is possible only when the banks lower their MCLR. So it is conditional and till then we have to keep our fingers crossed. This phenomenon is an outcome of an accommodative policy of the government and RBI. The success of this policy will depend on the application of this policy. It has to depend on how the lower rate is transmitted to the borrowers. According to some experts, the cascading effect of benefits will be a possibility in the coming months. It is expected of RBI to cut the repo rate by another 25 basis points in the future. This fall, however, depends on a fall in GDP growth to as low as 4.5%. It is reasonable for the RBI to keep the policy of accommodativeness going. This is the opinion of several leading economists.
Key aspects worth noting
There was immense cheer when it was speculated that the RBI was going to cut its repo rate by another 25 bps. Even if it has kept policy rates unchanged at the moment, it may do so in the future. It can be argued that home loan rates may come down to below 8% since many banks have now launched repo rate linked home loan products. In a poll in which many economists participated, it was expected of RBI to cut the repo rate to 4.9% going forward. This cut in repo rate should give a positive swing to retail borrowing as banks have linked their retail loans to the repo rate. This will naturally benefit those who wish to apply for home loans.
According to a report, SBI’s EBR or External Benchmark Rate is fixed at 8.05%. If RBI cuts the repo rate further by 25 bps, SBI’s EBR will also fall to a level of 7.8 %. In sync with the government’s accommodative policy and mission to revive the economy, the RBI is willing to keep rates softer for a longer period of time. In the given circumstances when GDP fell to as low as 4.5% in September, it is expected that RBI will keep the fiscal policy more accommodative. This is what economists expect.
There is another indicator of the repo rate going downhill. The Monetary Policy Committee has cut the repo rate by dint of revisions. It has been done over the concerns that growth momentum is going slow and that there is a need to boost liquidity in the financial system. Keeping in mind the stance of the RBI Monetary Policy Committee on keeping an accommodative policy alive and going, one can expect further cuts in rates especially if economic indicators remain weak. In spite of a series of fiscal measures including an initiative to slash corporate tax rates, the GDO growth rate still fell in the past. The slashing of corporate tax rates was aimed at boosting private sector investments in the country.
What experts feel
Inflation is low around this time and it is expected that it will remain so. In this setup, RBI has an ideal condition to go for rate cuts. These rate cuts are expected in future months. Borrowers from the banks will pay lower EMIs since banks are shifting to match the new benchmark prescribed by the central bank. It may result in lowering of lending rates by another 30 basis points as well.
There is another twist to the story. It is said that SBI will charge an additional 15 basis points from non-salaried persons. The persons in the higher risk bracket will be charged further by 10 bps. According to RBI, the benchmark it has fixed can be a repo rate or any other benchmark issued by the Financial Benchmarks India. FBI administers such rates. Other reports talk of frequent changes in EMIs with changes in the repo rate which is another concern that has to be addressed going forward.