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.
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.