RBI Cuts Repo Rate Back-To-Back By 0.25%, Loans Likely To Get Cheaper

Repo rate

First Published on Apr 5, 2019 @ 9:01 pm

The  Reserve  Bank  of  India  (RBI), on  Thursday, cut  the  repo  rate  by  25 basis  points  or  0.25  percent  to  6  percent. This  is  the  second  back-to-back  rate  cut  in  this  calendar  year  by  the  six-member  Monetary Policy Committee  (MPC)  of  RBI  under  new  Governor  Shaktikanta  Das.

Announcing  a  second  consecutive  cut  in  the  repo  rate  in  its  first  bi-monthly  monetary  policy  review  of  this  financial  year  FY19-20, the MPC  kept  the  policy  stance  ‘neutral’. Four  out  of  the  six  members  of the  MPC  voted  in  favor  of  the  decision  to  reduce  policy  rate  by  25 basis  points, while  the  other  two  voted  to  keep  the  rate  unchanged.

In  the  last  monetary  policy  review  on  February  07, RBI  had  reduced the  repo  rate  by  25  basis  points  after  a  gap  of  18  months. In  this calendar  year, RBI  has  cut  the  repo  rate  by  50  bps  in  total. In  2018, the  central  bank  had  raised  rates  by  50  bps  to  6.5 percent.

The  repo  rate  now  stands  at  6 per cent  down  from  6.25  per cent earlier. Repo  rate  is  the  key  interest  rate  at  which  the  central  bank lends  short-term  money  to  commercial  banks. The  rate  cut  by  the central  bank  in  FY19-20  was  anticipated  by  many  economists  and  the experts, amid  weak  economic  growth, benign  inflation, and  soft  global growth.

The  change  in  the  repo  rate  would  provide  relief  to  borrowers  and lead  to  lower  interest  rates  on  fresh  bank  loans. With  back-to-back rate cuts, home, auto  or  personal  loan  are  likely  to  get  cheaper  as  the RBI decided  to  cut  its  repo  rate  to  keep  prices  under  check  and  to support growth  activity.

Consumer  Price  Inflation  (CPI)

India’s  retail  inflation  for  January-February  quarter  averaged  at  2.3 per cent. Consumer  inflation  picked  up  to  2.57  percent  in  February  from 1.97  percent  the  previous  month. According  to  monetary  policy  report, Inflation  is  likely  to  remain  benign  in  the  short  term. The  RBI  lowered its  CPI  inflation  projection  to  2.4 percent  in  the  fourth  quarter  of 2018-19.

The  central  bank  expects  consumer  price  inflation  at  2.9 – 03  percent in  the  first  half  of  the  financial  year  2019-20, and  3.5 – 3.8  percent  in the  second  half, below  the  RBI’s  target  zone  of  4  percent.

Growth  Target

The  RBI  has  also  lowered  the  growth  projection  for  the  financial  year 2019-20  as  well. Now  RBI  expects  GDP  growth  for  the  financial  year 2019-20  at  7.2 percent, lower  than  its  February  projection  of  7.4 percent. The  RBI  said  it  expects  economic  growth  to  be  in  the  range of 6.8-7.1  percent  in  the  first  half  of  the  current  financial  year, and  in the range  of  7.3-7.4  percent  in  the  second  half.

Impact  of  the  rate  cut

Banks  take  a  cue  from  RBI’s  monetary  policy  stance  before  deciding  to cut  or  hike  their  lending  rates. However, the  quantum  of  reduction in their  lending  rates  will  also  depend  on  their  cost  of  deposits, operating costs, etc  as  these  are  also  factored  in  while  calculating  their  MCLR. Thus, any  reduction  in  repo  rate  encourages  banks  to  reduce  their home  loan  interest  rates  and  enhances  the  chance  of  transmission  of the  benefit  to  existing  and  new  home  loan  borrowers.

Since  the  last  policy  review  in  February, banks  have  reduced  their lending  rates  marginally  by  a  token  5-10  basis  points. However, RBI Governor  Shaktikanta  Das  said: “There  has  to  be  the  appropriate  and effective  transmission  of  rates.”

Will  the  rate  cut  reduce  the  loan  rates?

Existing  borrowers  on  floating  rate  will  be  able  to  benefit  from  the rate  cut  when  the  reset  clause  kicks  in. Your  future  EMIs  will  be recalculated  on  the  basis  of  the  interest  rate  existing  on  that  date applicable  to  your  loan. Generally, a  bank  offers  a  home  loan  with  a reset  period  of  six  months  or  one  year. Your  home  loan  linked  to MCLR  gets  reset  as  per  prevailing  market  conditions  and  existing lending  rate  under  the  MCLR  regime. For  instance, if  you  have  a January  reset  clause  on  your  loan, the  rate  cut  will  have  no immediate impact.

If  your  home  loan  is  still  linked  to  the  base  rate  or  benchmark  prime lending  rate  (BPLR), you  can  consider  switching  your  existing  home loan  to  MCLR  based  regime. This  is  because  MCLR  based  regime  offers greater  transparency  in  the  transmission  of  policy  rates  as  compared to  the  base  rate  and  BPLR  based  interest  rates  regime.

However, for  new  home  loan  borrowers, if  you  have  decided  to  apply for  home  loan, then  banks  will  be  offering  you  the  loan  under  the MCLR  regime.

The  RBI  cutting  the  repo  rate  is  good  news  for home  loan  borrowers. The  lowering  of  rate  means  banks  will  have  more  room  to  pass on the  benefit  of  this  rate  cut  to  loan  borrowers.

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