Urjit Patel’s maiden rate-setting decision as the Reserve Bank of India Governor has added a dash of colour to the festive season. The 25 basis point cut in the repo rate — the rate at which banks borrow from the RBI — will be a bonanza for the common man, too. Existing home and car loans are set to become a tad cheaper.
The hope is that lenders will pass on — ‘transmit’ in banking parlance – this rate cut to the consumer.
“We shall continue to watch out for economic data and accordingly address transmission of interest rates,” says Shanti Ekambaram, President, Consumer Banking, Kotak Mahindra Bank.
How it Works
For a loan amount of Rs 50 lakh which is repaid over 20 years, a cut in interest rate to 9.75 percent from 10 percent will lead to a reduction in repayment period by approximately 12 months. In other words, the loan gets repaid in 19 years, instead of 20 years.
If you choose to keep the term constant, the EMI goes down to Rs 47,425 from Rs 48,251 which is a saving of Rs 826 per month.
Though banks have been slow in passing on the benefit of lower interest rates to borrowers, things may change if interest rates continue down their downward journey. “Key observations were around the low growth outlook globally and Brexit, which has slowed global trade sharply. These, coupled with easy liquidity, are likely to continue to keep global rates soft,” Shanti Ekambaram adds. If the interest rates continue to slide further home loan consumers may see some additional reduction in interest rates going forward.
“Backed by a healthy set of domestic macros and sustained global deflation, I expect 75 bps further easing in the coming months,” says Rana Kapoor, MD & CEO, YES Bank.
If your bank has yet not passed on the benefit of lower interest rates, then it is time to revisit your bank and ask for a rate cut. If the bank declines to offer you lower interest rates, consider shifting your home loan to another lender. Most credit experts say that balance transfers are beneficial only when there is a difference of at least 100 basis points between the existing home loan interest rate and the rate on offer. Such a transfer fetches maximum benefits in the early years of home loans. Of course, do not ignore the charges and fees involved in the balance transfer. These can be negotiated if you have a good credit score.
If you get lower interest rates on home loans, do not opt for a reduction in interest rates. Instead go for reduction in terms of a home loan. Pay off your home loan early and enjoy debt free life.
Rate cut and fixed income investors
In the last couple of months, fixed income investors have seen a reduction in interest rates on corporate fixed deposits to the tune of 25-50 basis points. When the central bank lowers rates in the economy, the interest rates payable on fixed deposit go down. Do not be surprised, if your banks lower the fixed deposit interest rates in future. To tide over the situation, you may want to go for long-term fixed deposits – three to five years and lock in interest rates.
A word of caution – avoid investments in low-rated bonds and unheard-of company deposits in search of higher interest rates. It may cost you your capital.
Another way out for the fixed income investors is to latch on to long-term bond funds. If the interest rates fall, bond prices go up. If you invest in a mutual fund scheme that invests in long-term bonds, you may see capital gains if the interest rates fall. “The policy is largely positive for domestic bond markets in the near term. However, we shall have to watch the incoming data prints regarding inflation to estimate how RBI nuances its policy in the coming time,” says Killol Pandya, head fixed income, Peerless Funds Management.
However, if the inflation surprises on the upside, then these investments can be volatile. If you can stomach some volatility, do consider this option, otherwise it pays to stick to good old fixed deposits.