RBI Cuts Repo Rate by 25 Basis Points, Loans May Get Cheaper

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Responding to the growing clamour for easing of interest rates, the RBI Governor Urjit Patel in its first monetary policy review today announced a cut in the repo rate by 25 basis points (100 basis points=1%) i.e. 0.25% to a 6-year low of 6.25% from 6.50% earlier. The move assumes growing significance after the exit of ex-Governor Raghuram Rajan, who was often accused of declerating growth by keeping the rates higher. The six-member Monetary Policy Committee (MPC), headed by Urjit Patel, cut repo rate, the rate at which central bank lends to commercial banks, to 6.25%. The committee also reduced the reverse repo rate to 5.75%. The decision taken by the MPC aligns with an accomodative stance on monetary policy in consonance with the goal to achieve Consumer Price Index (CPI) inflation at 5% by the fourth quarter of FY 2016-17 and 4% in the medium term, while fuelling the growth, said the RBI in the fourth bi-monthly monetary policy review.

Loans to Get Cheaper

With the RBI announcing a cut in repo rates, you can see banks start cutting their Marginal Cost of Funds Based Lending Rate (MCLR), which has become a methodology for banks to reset lending rates on all floating loans from April 1, 2016. Customers, whose loans are based on base rate regime, can also switch to MCLR. Presently, the one-year MCLR of most banks stand at 9-10% in India. Now when the RBI has cut the repo rate, the banks will soon cut MCLR, which will ultimately reflect in the lower lending rates. However, the offered rate will be a mark up over the MCLR. So, home & car loan customers, who are on the MCLR regime, can expect to benefit from the lower interest rates.

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For Instance- The 1-year MCLR of ICICI Bank is 9.05 per cent now, while home loans are offered at 9.35% (9.3% for women borrowers). While the MCLR of State Bank of India (SBI) is 9.05%, while home loan rate is 9.3% (9.25% for women borrowers). But six months before, the MCLR of both lenders was at 9.20%. During the period from April till now, the MCLR has fallen down  by 0.15%.

Impact of Reduced Rates on Home Loan

Suppose the prevailing home loan interest rate of a certain bank is 9.40% and the very bank cuts its lending rate to 9.20% in the wake of RBI’s 25 basis point repo rate cut. What will then be the impact on loan EMI on your loan of say 30 lacs, 35 lacs and 40 lacs for 15 years? You can see that in the table below.

Table showing EMIs of different home loan amounts

Loan Amount  EMI at 9.40% EMI at 9.20% Saving in EMIs  Saving in Interest
Rs. 30 Lacs  Rs. 31,146  Rs. 30,786  Rs. 360 Rs. 64,803
Rs. 35 Lacs Rs. 36,337 Rs. 35,917 Rs. 420 Rs. 75,603
Rs. 40 Lacs Rs. 41,528 Rs. 41,048 Rs. 480 Rs. 86,403