As expected, the Reserve Bank of India kept the repo rate unchanged at 6.25% in its second bi-monthly monetary policy review of this financial year today. However, the apex bank cut the statutory liquidity ratio (SLR) by 50 bps to 20%, starting June 24. Industry experts said they were expecting the RBI to keep the repo rate unchanged, but the cut in SLR was positive for the banking industry as it will provide more liquidity to it, although it was too early to say whether it would result into any further rate cut or not. A few experts, however, said that with increased liquidity, some banks may consider cutting rates going ahead.
“The MPC has decided to keep the interest rates constant. At the same time SLR has been reduced by 50 basis points. Rates were not expected to fall and so there is no surprise here. The cut in SLR, however, will certainly infuse more liquidity into the banking system. Banks get the advantage of having more money to lend. Hope the credit off take will also improve. Housing loans could certainly get cheaper as provisioning requirements get reduced. Industrial loans may not get cheaper as other considerations like NPA resolution and margin pressure will prevent passing on the benefits of higher liquidity to the customers in a hurry,” said Ashish Kapur, CEO, Invest Shoppe India Ltd.
Also, to help banks lend more for housing in large cities and make high-value home loans cheaper, the RBI has reduced the risk weightage on home loans above Rs 75 lakh to 50% from 75% earlier. “This will ensure that rates in this segment reduce and more customers in this category who were doubtful will now take a plunge. The rates above Rs 75 lakh, that were .25-.5% higher and in the range of 8.6-8.9%, may now reduce and come to the same level as 8.35%,” said Rishi Mehra, CEO of Wishfin.com.
Earlier HSBC said they continue to expect the RBI to be on a prolonged pause, but with risks of a 25bp rate cut in August if certain conditions are met.
“We continue to hold on to our view that the RBI will keep the repo rate unchanged at 6.25% over the foreseeable future. However, if (1) ‘other factors’ turn even more benign, for instance, early rains push up reservoir levels significantly above normal, or (2) if the RBI, through its commentary on 7 June and minutes on 21 June, indicates that the wave of lower inflation expectations indeed is likely to continue having an overpowering effect, there are risks of a 25 bp rate cut at the August meeting. By then, it is also likely that the RBI would have seen two CPI inflation prints trending well below 3%,” it said.
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Govind Sankaranarayanan, COO–Retail Business & Housing Finance, Tata Capital, said, “Although inflation is at fairly low levels, there is a strong need to trigger greater lending to the corporate sector and thereby investments. It is likely that the Central Bank will continue to keep rates unchanged, taking the view that low interest rates are not the cause for a lower than expected investment and that other structural factors need to be addressed independent of the level of interest rates.”
Will banks cut rates?
As the repo rate remains unchanged, banks and financial institutions may follow suit, some of which are facing challenges regarding their NPAs etc. “Banks are not expected to cut lending rates any further. Since December 2016, both private and public sector banks have cut their lending rates drastically. Even though the RBI has reduced policy rates by 175 bps since January 2016, banks were reluctant to cut their lending rates for a long time. Since many banks have changed their rates recently, the RBI decision today is unlikely to have any impact on current bank rates,” said Ganesh Vasudevan, CEO, Indiaproperty.com.
Some experts, however, said that with increased liquidity, banks may consider cutting rates going ahead. “Apart from reduction of risk weights on housing loans, the RBI has reduced the statutory liquidity ratio (SLR) – the prescription for a minimum holding of government securities. As against investing 20.5% of their deposits in Gilts, banks will now have to invest only 20% with effect from June 24, 2017. This will ensure that rates come down further in next quarter or so,” said Mehra.
However, whether cut or no cut, it is the perfect time to take a home loan as home loans are already at a 10-year low which, combined with a significant fall in property prices, makes it an ideal condition for buying a piece of property. However, if banks and financial institutions decide to cut the rate any further, that will be an added benefit for homebuyers.
It may be noted that even a 25-50 bps cut in home loan rates results into a significant amount of savings for home loan borrowers.
Assume someone was planning to take a home loan of Rs 50 lakh for a period of 20 years at 8.50% interest. The EMI would have been Rs 43,391 in this case. Over 20 years, the borrower would have paid Rs 54,13,879 as interest. A 25 bps fall in the interest rate, however, would bring down the EMI to Rs 42,603 and the total interest paid to Rs 52,24,788. A 50 bps rate cut would bring down the EMI to Rs 41,822 and the total interest payable to Rs 50,37,281. That’s Rs 1,89,091 saved in case of a 25 bps rate cut and Rs 3,76,598 saved in case of a 50 bps cut in the interest rate.
What should the existing home loan customers do?
Experts say that to make a significant difference in the amount the existing home loan borrowers are paying, it is recommended that they should switch from their current base rate system of lending to the recently-introduced MCLR system. “This would save them a substantial amount as with home loan rate cuts by all the banks, the gap between the base rate at which old borrowers are paying interest and the current MCLR rate is widening. For instance, you might have availed your home loan at the rate of 10% about 5 years ago, which today stands at 8.5%, which is clearly a differential of 1.5%,” said Vasudevan.