personal finance

RBI keeps repo rate unchanged: What does this mean for your loans and fixed deposits?


After five rate cuts in a row, the Reserve Bank of India (RBI) has finally hit the pause button. The central bank, on Thursday, in its latest monetary policy review kept the repo and reverse repo rates unchanged. This is good news for fixed deposit investors who have been seeing their interest rates fall throughout the year. Hopefully, RBI maintaining status quo on rates will prompt banks to hit pause on cutting FD rates further.

The repo rate currently stands at 5.15 per cent and reverse repo rate at 4.90 per cent. In its last monetary policy review, the central bank cut the key policy rates by 25 basis points (100 basis points = 1 per cent). Since February 2019, the repo rate has been cut by a total of 135 bps.

In its monetary policy statement RBI stated, “After the introduction of the external benchmark system, most banks have linked their lending rates to the policy repo rate of the Reserve Bank. The median term deposit rate has declined by 47 bps during February-November 2019. The weighted average term deposit rate declined by 9 bps in October as against a decline of just 7 bps in eight months during February-September. This augurs well for transmission to lending rates, going forward.”

Here is a look at how the status quo on key rates will impact borrowers and FD investors.

Impact on FD investors

The decision to keep the repo and reverse repo rates unchanged may bring some respite for FD investors as banks have been cutting interest rates over the past few months, hitting returns.

Sample this: State Bank of India’s (SBI) interest rate on one-year FD as on November 2019 is 6.25 percent and for senior citizens the rate is 6.75 percent. In August, these FDs were earning 6.8 percent and 7.3 percent for senior citizens. This is a 50 bps cut in a matter of just three months. The class of investors hit hardest by falling FD rates is senior citizens. With FD rates earning less than other comparable fixed income investments, financial planners advise that senior citizens consider small savings schemes like post office term deposits and Senior Citizens’ Saving Schemes.

Also Read:
Falling interest rates hit pensioners

The government has kept the rates of these schemes unchanged for the October-December quarter. Currently, these small savings schemes are earning slightly higher returns compared to FDs. For instance, term deposits come with interest rates between 6.9 percent and 7.7 percent (paid out on a quarterly basis).

But do keep in mind that the interest rates on these small savings schemes are due for review in December.

Impact on borrowers

From October 1, all new floating rate loans given by banks will be linked to an external benchmark. According to RBI’s circular issued in September, it has directed banks to link their interest rate on loans to any of the benchmarks mentioned below:

a)RBI’s repo rate

b)Government of India’s three-month treasury bill yield

c)Government of India’s six-month treasury bill yield

d)Any other benchmark market interest rate published by Financial Benchmarks India Limited (FBIL).

Existing borrowers: What they can do to reduce their EMI burden

Loans linked to external benchmark regime

Borrowers whose loans are linked to the external benchmark regime will continue to pay the same amount of equated monthly instalment (EMI) as there has been no change in the repo rate.

Loans linked to MCLR
As the central bank has been cutting rates through the year, banks have also reduced their marginal cost of lending rate (MCLR). As per data available on SBI’s website, the bank has reduced the MCLR by 55 bps between January and November 2019.

However, you should remember that impact of the reduction in MCLR will only be felt once the reset date of your loan arrives. Usually, a bank offers MCLR-linked home loans with a reset period of six months or one year.

Therefore, under the MCLR regime, the interest rate on a loan gets revised as per prevailing market conditions only on its reset dates.

If you are servicing an MCLR linked loan and want to switch to an externally benchmarked one, then as per the RBI circular, you can do that by paying administrative costs. While switching your home loan from MCLR to one linked to an external benchmark, do check the spread and risk premium charged by the bank and compare with other banks to know which one is offering the cheaper loan.

Also Read: Home loan interest rates linked to repo rate

Financial planners suggest that one should make a switch only if the interest rate difference between the two is 0.50 per cent or more.

Also, remember that the loans under the externally benchmarked loan regime aresubject to higher volatility as the interest rates charged on your loan will change more rapidly with changes in the external benchmark. Do keep in mind that when RBI starts to hike key rates, your interest rates will go up in tandem.

With loans linked to base rate or BPLR

For those borrowers whose home loan interest rate is still linked to the base rate or benchmark prime lending rate (BPLR), you should consider switching your existing home loan to the external benchmark based loan regime.

According to industry experts, external benchmark regime offers more transparency in transmission of policy rates as compared to other rate setting mechanisms.

New borrowers

For new borrowers, loans taken by you now will be linked to an external benchmark as mentioned above. Though the RBI has kept the key policy rates unchanged today, any rate cut in the future will bring down your EMIs.

If you are planning to take home loan now, then eligible borrowers can also look at taking advantage of the Pradhan Mantri Awas Yojana (PMAY). The scheme offers credit-linked subsidy based on your annual income under its flagship programme ‘Housing for All’. To avail this subsidy, there are some eligibility criteria that must be satisfied by you.

Middle income group – I (MIG -I) having household income between Rs 6 lakh and Rs 12 lakh can avail interest subsidy of 4 per cent whereas middle income group – II (MIG -II) having household income between Rs 12 lakh and 18 lakh will get interest subsidy of 3 per cent.

The benefit of interest subsidy for both the groups is available till March 31, 2020.

Also Read:
Everything you need to know about PMAY





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