1. RBI Monetary Policy 2017: Home loans interest rates not to fall as RBI rate cuts put on hold

RBI Monetary Policy 2017: Home loans interest rates not to fall as RBI rate cuts put on hold

As widely expected, the Reserve Bank of India kept the repo rate unchanged at 6 per cent in its December 6 monetary policy today.

By: | Updated: December 6, 2017 6:26 PM
RBI monetary policy, RBI policy, repo rate, home loan, borrowers, home loans to become cheaper, home loan emi If the rates are cut in the months to come as the growth rate of home loans looks to be tapering off, the borrowers will certainly benefit from that move.

As widely expected, the Reserve Bank of India kept the repo rate unchanged at 6 per cent in its December 6 monetary policy today. This was as per industry expectations as market analysts and financial experts were expecting a status quo in the RBI’s December policy meet too.

Earlier, Morgan Stanley said that given the growth recovery and cyclical rise in inflation that they are projecting, they don’t expect the RBI to take up any further easing measures. “This has been supported by the recent MPC statement and accompanying Monetary Policy Report, which highlighted that CPI inflation would remain above 4% (the centre of the central bank’s target band) throughout the forecast horizon, suggesting little room for further easing. We, thus, expect the RBI to maintain its neutral stance for longer,” stated Morgan Stanley in its latest research report.

However, as the economy evolves with a broadening recovery and rising headline inflation, “we think that the RBI will gradually shift towards a hawkish tone, eventually paving the way for a rate hike in the second half of fiscal 2019, with a total of three rate hikes expected by the end of calendar 2019,” it added.

Talking about their pre-RBI policy expectations, Amar Ambanai, Partner and Head of Research, IIFL Investment Managers, also said that they expect the RBI to sit tight on the monetary policy, with no rate move expected for at least the next two quarters.

In fact, there’s a possibility of the central bank adopting a relatively hawkish tone given the sharp liquidity dip in banking, growing inflation and concerns of fiscal slippage. Liquidity could suffer even more given the traction in lending activity during the second half of this fiscal year. On the inflation front, CPI is poised to surge above 4% in the coming months, influenced by higher oil and food prices. Low base effect and HRA hike (7thPay Commission) could raise core inflation while higher government spend and deviating fiscal deficit target could translate into inflationary risks. “Although GST tax cuts on consumer goods, light electrical and home building items can provide some relief to consumers, a rebound in economy and rise in household consumption will stoke demand side price pressure. Needless to say, ongoing policy normalization by global central banks has straitjacketed the RBI in terms of a rate move,” he said.

After the policy announcement, some experts said that as the RBI has put the rate cuts on hold, it is unlikely that home loans will become cheaper in the near future. However, if the rates are cut in the months to come as the growth rate of home loans looks to be tapering off, the borrowers will certainly benefit from this move.

“Any revision in the repo rate affects the end customer based on the reset period in the MCLR-linked loans. In a decreasing interest rate scenario, borrowers are likely to benefit from considerable savings on EMIs. The savings assume higher value for new borrowers as home loans are typically taken for longer periods,” said Ranjit Punja, CEO & Co-Founder, Creditmantri.com.

It should, however, be noted that while new home loan borrowers instantly benefit from any cut in lending rates, that is not the case with the existing borrowers. For example, even a 25-50 bps rate cut results into a significant amount of savings for new borrowers.

Assume someone was planning to take a home loan of Rs 40 lakh for a period of 20 years at 8.50% interest. The EMI would have been Rs 34,713 in this case. Over 20 years, the borrower would be paying Rs.43,31,103 as interest. A 25 bps fall in interest rate, however, would bring down the EMI to Rs 34,083 and the total interest paid to Rs 41,79,830. A 50 bps rate cut would bring down the EMI to Rs 33,458 and the total interest payable to Rs.40,29,825. That’s Rs.1,51,273 saved in case of a 25 bps cut and Rs 3,01,278 saved in case of a 50 bps cut.

Impact of Home Loan Rate Cut on EMI & Total Interest Payable

Current rate

New rate

Old EMI

New EMI

Difference (EMI)

Old interest

New interest

Difference (Interest)

8.50%

8.25%

34713

34083

630

43,31,103

41,79,830

1,51,273

8.50%

8.00%

34713

33458

1255

43,31,103

40,29,825

3,01,278

Existing home loan borrowers, however, would have to wait for their reset period to kick in if the rates are cut. “Sometimes this could even mean waiting for a year depending on the agreed reset-period for MCLR-linked loans. If such is the case, customers who have taken home loans earlier could opt for a balance transfer and switch to a suitable loan offering. In such a case, however, the customer would also have to consider the additional charges that come with a loan transfer,” suggests Punja.

However, as the status quo situation prevails, any reduction in the rate of interest on loans for the customer depends on the margins that banks and housing finance companies can afford.

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