Loan EMIs to Fall as RBI Cuts Down Repo Rate Yet Again; SBI Follows up & Slashes Interest Rates

Bringing a yet another interest rate cushion to the borrowers, the Reserve Bank of India in its third bi monthly Monetary Policy Committee (MPC) for Financial Year 2019-20 has announced a repo rate cut of 0.35 bps to 5.40 per cent. This is the fourth consecutive rate cut by the apex bank in the calendar year 2019, and takes the total benchmark lending rate reduction to 1.10 percent.

“All members of the MPC unanimously voted to reduce the policy repo rate and to maintain the accommodative stance of monetary policy,” said the RBI statement.

As soon as RBI announced its decision, the largest public sector bank of the country, the State Bank of India reduced its lending rate across tenors by 15 bps, making Home Loan, Personal Loan and car Loan cheaper for new and existing customers.

Earlier in the day the industry watchdog ASSOCHAM had said that it expected the central bank to cut the benchmark policy rate by as much as 50 basis points. ASSOCHAM had said that it is ideal timing for rate cut as inflation is below the RBI target of 4 per cent while citing the gap between the nominal and real interest rates.

Repo rate and Loan Interest Rates: Correlation

Well, repo rate is the rate at which banks borrow money from the RBI. So every reduction in the benchmark lending rate, saves money with banks as it cuts down lending cost for them. Thus the banks are in a better position to reduce the lending rates after a repo rate cut.

Other factors also lead to interest rate reduction. In order to reduce the lending rates, the banks also slash the savings account interest rate and fixed deposit interest rates. All these factors collectively help lenders pass on the interest rate cut benefits to the customers.

Since April 2016, RBI has mandated banks to link its floating rates to MCLR. So, the Car Loans and Home Loans at floating rate are now directly linked to the fluctuations in MCLR.

The steep rate cut to the tune of 1.10% in central bank’s lending rate has thus resulted in reduction of MCLR of banks. However the effective rate cut is dependent on the announced MCLR cut by the respective banks.

Despite the assurance of effective and faster transmission of benchmark lending rate cut to the final customers by RBI Governor Shaktikanta Das, banks have been passive in passing on the benefit to the customers.

Prior today’s 15bps rate cut, SBI had reduced its MCLR by 5 basis points in July 2019. The overall rate cut had been 10-15 bps in all by the most public and private sector banks. The consumer is thus yet to gain benefit of rate cuts.

Earlier the central bank had proposed that retail lending rates would soon be linked to external benchmark factors such as repo rate, T-bill yied etc so that the rate reductions could be swiftly transmitted to the customers.

The State Bank of India recently introduced short-term Home Loans linked to repo rate. It was seen as the step in the direction of making interest rate fluctuations transparent for customers. For, any change in repo rate would reflect automatically on the interest rate of this new home loan product.

However, soon the RBI accepted that more deliberation on the subject is required and the decision to link lending rates to external factors is put on hold without a defined deadline for the same.

How does repo rate cut would affect home loan EMI?

Most Home Loan customers borrow their Housing Loans at 1 year MCLR or 6 months MCLR. This means, the rate of interest would be reset annually or bi-annually respectively for these loans.

Thus the current reduction of 15 bps on SBI Home Loan would affect the EMI of the existing Home Loan customers only when the rate cut meets their reset date. On the date of reset of Home Loan, the Home Loan interest Rate would be revised as per the current MCLR rate of the lender. For, banks revise their MCLR each month based on external factors and it is not possible to precisely predict the MCLR on the next re-set date.

However, the new Home Loan applicants can apply for SBI Home Loans at the revised 1 year MCLR of 8.25% (announced today). The SBI’s Repo Linked Lending Rate (RLLR) for cash credit/overdraft stands revised to 7.65%.

As Home Loans are long term commitment, a lot of borrowers would use the reduced rate of interest to prepay their Home Loans and save significantly on interest rate. It is also a good opportunity to make us of Home Loan Balance Transfer if you have been waiting for supporting market conditions.

Earlier similar series of rate cuts were observed after global financial crisis a decade ago.