The Reserve Bank of India (RBI) in its bi-monthly review of monetary policy held on 2nd August 2017 announced a cut of 25 basis points in repo rate, the rate at which the central bank lends to commercial banks, to 6%. Besides, the RBI has adjusted the reverse repo rate, marginal standing facility and bank rate to 5.75%, 6% and 6.25%, respectively. The RBI has, however, retained the real GVA growth projection for FY 2017-18 at 6% as made in June 2017.
The 6-member Monetary Policy Committee (MPC) headed by Governor Urjit Patel announced 25 bps repo rate cut in line with the market expectations. Four members of the MPC wanted a 25 bps cut. While one wanted a 50 bps cut, the other member voted for status quo.
The rate cut could transpire a fall in the overall lending rates of the banks and other financial institutions. Retail loans like home loans, personal loans and car loans may get cheaper with the recent RBI move. The rates could also soften for the SME segment, wherein the interest rate charged ranges from 9.50%-17% per annum.
Impact on Home Loan
The rate cut is expected to lower down the cost of funds for banks, which in turn, would reduce the benchmark MCLR, abbreviated for Marginal Cost of Lending Rate. The reduction in the MCLR would lead to a fall in the lending rates on a home loan. If the top banks respond in equal measure to RBI’s 25 bps repo rate cut, you could expect the interest rates to fall to as low as 8.10%, from the existing lowest of 8.35%. So, the new borrowers can make hay with the rate cut. The per lakh EMI would fall to ₹741 from ₹758 at the existing rate of 8.35%.
Example-If you are looking to avail a home loan of ₹30 lakhs for 20 years and want to know the difference of EMI and interest outgo under the existing and the likely rates, you can glance at the table below.
|Loan Amount (In ₹)||Tenure||Interest Rate||EMI (In ₹)||Interest Outgo (In ₹)||Total Liability (In ₹)|
So, the new borrowers can reduce their interest outgo by ₹1,12,886 over the course of 20 years, while having to pay an EMI of ₹25,280, lower than ₹25,751 the amount to be paid by the older counterparts.
Impact on Personal Loans & Car Loan
The reduction in the cost of funds could also make lenders revise the personal loan and car loan rates. However, the extent of rate reduction may not be at par with the cent reduction in the repo rate. Personal loan rates now range from 11%-25% per annum, while the interest rate on a car loan can be anywhere between 8.75%-12% per annum.
What About Base Rate Customers?
The borrowers who are under the base rate regime can also expect their rates to soften. The base rate of the banks starts from 9%. The good thing about the base rate is that the lending rates change with a very change in the interest rate mechanism, much unlike MCLR where the rates are reset once a year.
RBI to Study MCLR Mechanism for Efficient Transmission of Rate Cut Benefits
Expressing anguish over the not so efficient transmission of rate cut benefits to the consumers by banks, the RBI has stated that an internal group would assess the functionality of the MCLR regime currently operational for interest rate setting on the floating rate loans disbursed by the banks.
The RBI, since April 2015, has cut the repo rate by 150 basis points. At that time, it was at 7.5% and now languishes at 6%. Banks, in response to the RBI’s rate cut, have slashed the MCLR by 70-130 basis points. The base rate reduction has been to the tune of 30-85 basis points in the said period.
SBI, BoB, HDFC Bank & Others Cut Savings Rate
SBI, a couple of days back, cut down the savings bank rate for the first time since the deregulation of RBI on savings rate in 2011. The bank had cut the savings rate from 4% to 3.5% on a balance of upto ₹1 crore. However, the bank retained 4% rate for balance above ₹1 crore. SBI in its statement had hinted that the pressure to maintain the margin was mounting with MCLR and lending rate falling to 8% and 8.35% respectively. On the other hand, fixed deposit rates are languishing at 5.50%-6.75%. Savings rate before the latest cut was at 4%. Taking that into account, the lowest margin would come to be 1.60% (8.35%-6.75%). In its statement, the public lender also stated that the savings rate cut would enable it to lend to the customers at the existing MCLR.
Bank of Baroda (BoB), another major public sector bank, has also slashed the savings rate by 50 bps on a balance of upto ₹50 lakhs. With this, the savings rate has come down to 3.5% from the previous 4%. However, it has decided to retain 4% rate on an account balance of more than₹50 lakhs.
HDFC Bank, the Mumbai-headquartered private lender, has also slashed the interest on savings bank account to 3.5% for a balance of less than ₹50 lakhs. However, it has retained the 4% rate on balance above ₹50 lakhs.
Axis Bank has cut the savings rate by 50 bps to 3.5% from 4% for a balance of upto ₹50 lakhs. The customers, with an account balance of more than ₹50 lakhs, will continue to earn interest at 4%.
Indian Bank, like Axis Bank, has also slashed the interest rate on savings bank account to 3.5% for a balance of upto ₹50 lakhs and 4% above ₹50 lakhs.
Following the footsteps of other banks, Yes Bank has also slashed the savings bank rate to 5% for a balance of less than ₹1 lakh. For deposits above ₹1 lakh and below ₹1 crore, the bank will continue to offer 6% interest.
Karnataka Bank has also slashed the savings rate from 4% to 3% on an account balance of below₹1 lakh. However, the private lender increased the interest rate from 4% to 5% on a savings account balance of above₹1 crore.
GST, Inflation & Weak Manufacturing Growth Led to Repo Rate Cut
Many economists were doubtful of the positive impacts of the Goods and Services Tax (GST) in the short-term. However, their long-term view on the indirect tax reform sounds positive. True to their say, the manufacturing sector was jolted in the month of July largely due to the implementation of the GST as the growth retarded to the lowest in 8 years. The Nikkie Manufacturing Purchasing Manager’s Index (PMI) shows the manufacturing activity slowed down to 47.9, the lowest ebb since February 2009. Interestingly, the PMI stood at 59.9 in June. Taking that into account, the month-on-month decline is 12 in numbers. A score above 50 indicates the expansion of the activity. Whereas, below the said level, indicates contraction.
If experts are to be believed, a major part of the blame is attributable to the GST. New factory orders fell for the first time since demonetization. The manufacturers have expressed concerns over the enhanced cost burdens in July due to higher tax rates in the wake of GST implementation. But they also agreed that the rise in input costs was moderate and much lower than the long-term average.
The Consumer Price Index-based inflation shrunk to a record low of 1.54% in June, even lower than the central bank’s target of 2%-6%. Besides, the monsoon is recorded to be 2% above normal at the end of last month.
All these factors have pointed to a repo rate cut of 25 bps, which would make the banks to ease the loan rates and the reduce the EMI afterward.