Demonetization caused Rate Cuts – A Raincheck !
Last Updated : Dec. 7, 2016, 7:01 a.m.
The Prime Minister Narendra Modi shocked the entire nation by announcing the ban of Rs.500 and Rs.1000 currency notes, effective midnight,November 8th,2016. While people are still recovering from the shock, another big news came into the limelight i.e. rate cuts! Now, you must be wondering how the demonetization of higher currency notes affects your investments? How it's gonna create an impact on your car and home loan? To give you more clarity on the same, we are here to help you. Read this post below to know the answers of your above questions.
Get Ready to Enjoy EMI Fall in Car & Home Loan
Yes, it is absolutely true that your EMIs of home and car loan could fall in the future due to the after effect of demonetization. Moreover, with more than 2 lakh crore cash deposit so far in the banks could lead to soften the bonds yields, setting the stage for reduction in interest rates on home and car loan by 1%-2%. Demonetization created its impact on the money circulation in the market, which could drive down both prices as well as inflation.
Car Loan
For example-Ankita Sharma a 25 year old professional is working in a renowned organization and earns a salary of Rs.30,000. She took a car loan of Rs.3,00,000 for 5 years at an interest of 10.5% about a few months ago. Now, after demonetization came into effect, the interest rates could get lowered by 1%-2%. So, let's find out how this rate cut affects Ankita, who is paying her car loan EMIs.
In order to have more clarity on the same, kindly refer the table below.
| Scenarios | Loan Amount | Interest Rates | Tenure | EMI | Interest | Total Amount | ||
|---|---|---|---|---|---|---|---|---|
| Existing Rate | Rs.3,00,000 | 0.105 | 5 Years | Rs.6,448 | Rs. 86,890 | Rs. 3,86,890 | ||
| On Cut of 1% | Rs.3,00,000 | 0.095 | 5 Years | Rs.6,301 | Rs. 78,034 | Rs. 3,78,034 | ||
| On Cut of 2% | Rs.3,00,000 | 8.5 | 5 Years | Rs.6,155 | Rs. 69,298 | Rs. 3,69,298 |
Home Loan
30 year old Ashish Aggarwal is a senior manager in a reputed company and withdraws a monthly salary of Rs.45,000. He took a home loan of Rs. 25,00,000 for 20 years at an interest rate of 11.5% per annum about 6 months ago. Now, after demonetization of Rs.500 and Rs.1000 notes, interest rates could get lowered by 1%-2% . So how this rate cut will impact Ashish, who is paying the EMIs of his home loan?
In order to have more clarity on the same, kindly refer the table below.
| Scenarios | Loan Amount | Interest Rates | Tenure | EMI | Interest | Total Amount | ||
|---|---|---|---|---|---|---|---|---|
| Existing Rate | Rs.25,00,000 | 0.115 | 25Years | Rs.25,412 | Rs.51,23,517 | Rs.76,23,517 | ||
| On Cut of 1% | Rs.25,00,000 | 0.105 | 25Years | Rs.23,605 | Rs.45,81,363 | Rs.70,81,363 | ||
| On Cut of 2% | Rs.25,00,000 | 9.5 | 25Years | Rs.21,842 | Rs.40,52,725 | Rs.65,52,725 |
As you can clearly see the difference in EMIs and total outgo on home loan above in different scenarios of car and home loan. The rate cut, if comes into effect, can lower the interest of Ankita by Rs.8,856-17,592, and of Ashish's by 5,42,154-10,70,792.
Reduced Fixed Deposit Rates are Calling
Many banks have started offering low interest rates on fixed deposits. So, the big question here is-why banks are reducing their FD rates? Well, this is because banks are set to see their CASA ratio (Current Account, Savings Account) to show some improvement with little effort giving them the elbow rule so as to make the borrowing cheaper. The relevance of CASA is fact that they are low cost funds for banks as compared to time deposit, hence can improve the margin for them. In fact, with banks receiving a lot of cash deposit to lend, they can easily cut down the FD interest rates. Why they would offer you higher rates on FD, when banks can easily get the money from savings bank accounts?
Furthermore, if you are a senior citizen, investing your money in Senior Citizen Savings Scheme (SCSS) will fetch you great benefits, though rates could fall, but you can expect the higher returns than bank fixed deposit. In fact, small saving schemes like PPF and NSC also offer you higher returns as compared to bank fixed deposits. In addition to this, another great option is to invest in tax free bonds, giving you 6% return with no-lock in period. If you meet the higher tax bracket criteria, it would be an excellent investment option as interest you earn on these tax free bonds is not taxed.
Let's take a look at the table below to understand the effect of pre and post demonetization on bank Fixed Deposits.
| Banks | Deposit Amount | Maturity Period on Which Change is Effected | Previous Rate | Revised Rate | Expected Value Pre-Demonetization | Expected Value Post-Demonetization | ||
|---|---|---|---|---|---|---|---|---|
| SBI | Rs. 1 Cr | 1 Year-455 Days | 7.15% p.a. | 6.90% p.a. | Rs.1,09 Cr (Inclusive of Rs. 9.02 Lakhs as Interest) | Rs. 1,08 Cr (Inclusive of Rs. 8.69 Lakhs as Interest) | ||
| ICICI Bank | Rs. 1 Cr | 390 Days-2 Years | 7.25% p.a. | 7.10% p.a. | Rs. 1.15 Cr (Inclusive of Rs. 15.02 Lakhs as Interest) | Rs. 1.14 Cr (Inclusive of Rs. 1.47 Lakhs as Interest) | ||
| HDFC Bank | Rs. 1 Cr | 1 Year-2 Years | 8.00% p.a. | 7.75% p.a. | Rs. 1.167 Cr (Inclusive of Rs. 16.64 Lakhs as Interest) | 1.161 Cr (Inclusive of Rs. 16.10 Lakhs as Interest) | ||
| United Bank Of India | Rs. 1 Cr | 46 Days-1 Year | 4.00%-6.25% p.a. | 4.00%-6.00% p.a. | Rs. 1.04 Cr-1.062 Cr (Inclusive of Rs. 4 Lakhs-6.25 Lakhs as Interest) | Rs. 1.04 Cr-1.06 Cr (Inclusive of Rs. 4 Lakhs-6 Lakhs as Interest) | ||
| Canara Bank | Upto Rs.1 Cr | 270 Days-5 Years | 7.25-8.94 | 7.15-8.82 | Rs.1.43 Cr-1.55(Inclusive of Rs.43 Lakhs-55 Lakhs as Interest) | Rs.1.42 Cr-1.54 Cr (Inclsuive of Rs.42 Lakhs-54 Lakhs as Interest) |
Good News for Mutual Fund Investors
With demonetization of Rs.500 and Rs.1000 notes, there is no denying of the fact that mutual fund industry will receive the benefit in the long run. Moreover, few banks have reduced their fixed deposits rates, thus with less interest gain on FD, people will soon shift to mutual funds in order to get better returns. Hence, the investment in mutual fund schemes will rise in the near future. However, with the effect of demonetization on falling rate cuts in the economy, debt mutual funds have a lot more in store for you. Yes, debt mutual fund schemes will do well in the future and will continue to do the same for some time, according to experts.
You can go for fundamentally strong stocks, which can help you reap maximum benefits in the long run. However, with stock markets falling due to the prevalance of uncertainty post demonetization, it would be a wise move to invest in good equity mutual funds at a lower price. You can expect good returns in the near future from equity mutual funds.
(Updated on:21 November,2016)