RBI Keeps The Repo Rate Unchanged At 5.15% In Its Fifth Monetary Policy Review 2019
The RBI keeps the repo rate unchanged at 5.15 percent at its bi-monthly monetary policy review on Thursday. All six-members of the Monetary Policy Committee (MPC) of the Reserve Bank Of India voted unanimously to hold the key interest rate. The repo rate is the key interest rate at which the RBI lends short-term funds to commercial banks.
The Monetary Policy Committee had reduced the benchmark lending rate by 25 basis points to 5.15 percent at its last policy review meeting in October. Also, MPC had cut the repo rate by 35 basis points in its August policy review and 135 bps so far this calendar year.
The MPC also decided to continue with the accommodative stance as long as it is necessary to revive growth while ensuring that inflation remains within the target. While the RBI committee members recognises that there is monetary policy space for future action, given the evolving growth-inflation dynamics, they felt it appropriate to take a pause at this juncture.
The MPC said that the actual inflation outcome for Q2 evolved broadly in line with projections – averaging 3.5 percent. However, the retail inflation increased to 4.62 percent in October, breaching the RBI’s medium-term target of 4 percent for the first time in 15 months, mainly on account of higher food inflation. The RBI has raised its consumer price index (CPI) projection forecasts at 5.1-4.7 percent in the second half of the current financial year, and 4.0-3.8 percent in the first half of the next financial year 2020-21.
The RBI, however, lowered its growth forecast of gross domestic product (GDP) to 5 percent in the current financial year down from its earlier expected growth of 6.1 percent in the October policy review meeting. It said that while improved monetary transmission and a quick resolution of global trade tensions are possible upsides to growth projections, a delay in the revival of domestic demand, a further slowdown in the global economy and geopolitical tensions could pose downside risks to growth. India’s economy grew at 4.50 percent in July-September.
What does Repo-rate Linked Lending Rate (RLLR) mean for home loan borrowers ?
To begin with, let’s first understand the policy rate or repo rate. Repo rate is the interest rate at which the RBI lends short-term money to commercial banks. In fact, it lays the basis for interest rates on loans in India.
So far, the interest rate for normal home loans are linked to the marginal cost of funds-based lending rate (MCLR), an internal benchmark set by banks, since April 2016. The MCLR was a departure from the earlier base rate regime.
The RBI’s intention was to allow better transmission of its repo rate cuts to consumers. However, the transmission of the rate cut by the apex bank to the end customers still remains slow. In fact, there was a regular complaint in the past from borrowers that the benefits of the deduction in the repo rate by the RBI were not getting transmitted to the end consumers even under the MCLR regime. However, whenever there was an increase in interest rates by the regulator, the banks were very quick to pass that on to borrowers.
So, one of the RBI’s recent concerns has been the efficient and faster transmission of its rate cuts to consumers. Therefore, RLLR linked home loan came into effect for the speedy transmission of policy rates to borrowers. The new repo rate-linked home loans could be cheaper and more transparent for borrowers. However, they also, carry the risks of the monthly installments being increased in size in the event of a sustained increase in the repo rate.
How repo rate-linked lending rate of home loans are fixed ?
The RLLR have a base spread of 2.25 percentage points over the RBI’s repo rate. The repo rate of the RBI at the time of launching the product in July was 5.75 %, which meant the effective RLLR would have been 8 %. On top of this, the bank will add a risk-based spread of 40-55 basis points (bps), depending on the risk assigned to the borrower. So effectively, RLLR home loan interest rate becomes 8.40 – 8.55 % for an amount up to Rs 75 lakh whereas home loans based on the MCLR is anywhere between 8.55 – 9.10 % for the same amount. Every time the RBI changes the repo rate, it will change from the 1st of the following month.
For example, the RBI has most recently in August, cut the repo rate by 35 bps from 5.75 percent to 5.40 percent. However, there are some mark-ups on the RLLR rate which pushes the effective rate higher. Since, there is a base spread of 2.25 percentage points over the RBI’s current repo rate, subsequently, the RLLR will be further come down to 7.65 percent from 8.0 percent. Besides, the bank will add a risk-based spread of 40-55 bps, depending on the risk group of the borrower. So effectively, RLLR home loan interest rate would be 8.05 – 8.20 % for an amount up to Rs 75 lakh to its customers. Since, SBI intends to reset the RLLR at the end of the month of a repo rate cut, therefore the rate revision should happen from 1st September.
EMI payments
Equated monthly installment (EMI) payments in RLLR are not similar to a regular home loan EMI payment. The bank will segregate the EMI amount under this scheme of the product. Here, the principal EMI will be fixed at principal installment while interest is to be paid monthly as and when applied to the account. You have to repay a minimum 3% of the principal loan amount every year in equated monthly installments and interest will be in actual.
How RLLR home loans are different from MCLR ?
The RLLR home loan differs from the MCLR linked home loan. The MCLR could be different for different banks.
Your home loan rate would automatically reset at a fixed interval to the MCLR prevalent at the time. While RBI’s repo rate cuts happen in a more timely manner, the transmission of the same to the end consumers may be only partial. However, when interest rates are rising, MCLR provides a cushioning for a certain time.
For example, this year alone, the RBI has cut the repo rate by 110 bps whereas, according to some estimates, banks have transmitted only a 29 basis points cut to the consumers. The SBI’s home loan rate has come down from 8.75 percent in January to 8.35 percent till now, a decline of only 0.40 percent.
However, a repo rate-linked loan rate, an external benchmark of the bank will be more responsive to RBI’s rate cuts. An external benchmark is a better tool for faster and effective transmission of policy rates. Therefore, it is a better tool for faster and effective transmission of the RBI’s policy rate to the end consumer. This is also a good move from a transparency point of view for a home loan borrower. You will be knowing that what the rate of interest will be following an RBI action and when it will come into effect.
There are some risks involved for the borrowers when opting for the repo rate-linked home loan as the changes in the interest rate of the loan can be more frequent and it could affect the changes in the installment amount more often. This frequent change in the interest rate is not there in case of the MCLR regime as there is a reset clause in the MCLR.
However, the RLLR home loan is highly volatile and borrowers should be prepared for this type of volatility while going ahead with such a loan. But sometimes, RBI keeps the repo rate unchanged also as it happened in its fifth monetary policy review in December this year. This, however, is a risk most borrowers already take when they opt for floating-rate loans. It will be very responsive to changes, even more so than the MCLR. The repo rate-linked home loan will transmit rate cuts in a faster and more efficient manner so that the end-user can benefit from the RBI action.
Also read: SBI launched repo rate-linked home loan (RLLR). How does it differ from the MCLR ?
RBI Keeps The Repo Rate Unchanged At 5.15% In Its Fifth Monetary Policy Review 2019
