Those planning to take a new loan are set to benefit from the RBI Monetary Policy Committee’s decision on Friday to cut the repo rate by 25 basis points (bps) to 5.15%. This is for the fifth time in a row that the central bank has slashed the short-term lending rate. Repo rate is the interest rate at which the RBI lends money to banks.
The repo rate cut is a great incentive for borrowers as all new floating rate loans are supposed to be linked to any of the four external benchmarks prescribed by the RBI from October 1. This will facilitate faster transmission of RBI’s rate cuts down to the borrowers.
Here is how the latest rate cut by the RBI will affect new and existing borrowers.
Effect of rate cut on borrowers:
The repo rate cut announced by RBI on Friday is likely to bring Equated Monthly Installments (EMIs) of borrowers down making it cheaper to avail new loans.
More so, now with the linking of floating rate loans with the external benchmarks, the loans in comparison with the ones linked to MCLR will become cheaper. Hence, the home and auto loan seekers this festive season are going to get attractive rates on their borrowings.
For instance, if an individual is seeking a Rs 30 lakh loan for a tenure of 20 years at the interest rate of 8.20 (SBI rate), his EMI comes to about Rs 25,468. Now with Friday’s announcement of a cut in the repo rate, the effective interest rate comes to 7.95 (8.20-0.25) and the resultant EMI is arrived at Rs 25,000. This translates into an EMI cut of Rs 468 (compare Rs 25,468 with Rs 25,000).
Interest earned on FDs may drop:
However, people, particularly senior citizens who invest in FDs and primarily rely on the interest income from these deposits, are expected to witness a drop in their income.
Owing to consecutive repo rate cuts from the beginning of the year, banks have been lowering the interest rates on FDs for a couple of months now. The State Bank of India (SBI) has already cut its FD rates thrice since August. The bank at present offers an interest rate of 6.5 per cent on its one-year FD.
Hence, those looking for other investment options can consider post office small savings schemes, Public Provident Fund (PPF), Sukanya Samriddhi Account (SSY), National Savings Certificate (NSC) and Senior Citizen Savings Scheme (SCSS).
The government has kept the interest rates on these schemes unchanged for the October-December quarter of FY20 (2019-20). Their returns are slightly higher than FDs.
A PPF or NSC will fetch an investor a 7.9% interest rate, SSY will offer 8.4% interest rate and the five-year SCSS will fetch 8.6% interest rate. All these interest rates are higher the current FD rates offered by banks.