After keeping its key policy rate unchanged at 6.25% for a long time, the Reserve Bank of India on Wednesday cut its repo rate by 25 basis points to 6.00% – the lowest since November 2010 – as a slump in food prices sent the June consumer inflation to a more than five-year low of 1.54%. This was as per industry expectations as market analysts and financial experts were hoping for at least a 25 bps rate cut this time.
HSBC, for instance, had earlier said that they expect the RBI to cut the policy repo rate by 25 bps on 2 August to bring it down to 6%. They also expect the central bank to maintain its neutral stance, which is consistent with moderate rate cuts. “Beyond August, there is a risk of a further 25 bp rate cut later in the year if CPI inflation (without the direct impact of the seventh pay commission housing) continues to undershoot the 4% target, even in the second half of FY18. For now, however, it may rise to the 4% handle over 2H, but much will depend on reservoir levels and price of perishable food items from here on,” it said in a research report.
Abheek Barua, Chief Economist, HDFC Bank, also said that the RBI might cut the repo rate by 25 bps. “While some of the inflation drivers could well be temporary, the RBI cannot afford to completely overlook the softness in core inflation. Over 40 per cent of its components have shown a sustained decline, corroborating the fact that the real economy is running well below its potential. However, it will take good care to avoid the cut as being a shift in its stance. Thus, the communication in the policy will give the impression of a somewhat ‘reluctant rate’ cut replete with caveats and riders,” he said.
The next few months are likely to be event heavy both from the domestic and global perspective. G-7 central banks may start tapering their balance sheets, the US Fed could hike the policy rate and the full extent of the farm loan waiver and its funding will reveal itself. Once the dust settles, there could be room for another rate cut in 4Q FY18. Whatever be the case, financial experts say that a cut in the repo rate means cheaper loans for borrowers. As it is, post demonetization, banks are flush with funds and fixed deposit rates have fallen. A cut in the repo rate would act as an impetus to the lenders to reduce the lending rates further.
“A 25 bps cut in the repo rate by the RBI means that loans – be they home, automobile, or personal loans – are set to get cheaper. Banks factor in the repo rate when they calculate the MCLR. With a cut in the repo rate, the MCLR, too, will see a downward revision. Moreover, last year’s demonetization and the muted lending scene has left banks flushed with liquidity, and many banks are already working on revising their lending rates. This means that all loans – new and existing – are set to become cheaper,” says Adhil Shetty, CEO, Bankbazaar.com.
It is also a fact that for most of the banks, margins are a concern, loan growth is slow and they would feel the pressure to pass on any rate cut. However, “banks who want to be aggressive and build books, they will bring this rate to the 8.25% level. Banks may come up with promotional offers till the festival season to attract more customers. The home loan rates could come down to 8.20%-8.65% per annum on an average. So, the new borrowers can expect the EMIs to come down, which would also cut down the interest outgo over the loan tenure,” says Rishi Mehra, CEO of Wishfin.com.
It is, however, interesting to note that while new home loan borrowers benefit from a cut in lending rates immediately, that is not the case for the existing borrowers. For new borrowers, for example, a 25-50 bps cut in home loan rates would mean a significant amount of savings.
Assume Mr A takes a housing loan of Rs 50 lakh from a housing finance company for a period of 20 years at 8.50% interest. This would imply an EMI of Rs 43,391. Over 20 years, Mr A would be paying Rs 54,13,879 as interest. A 25 bps fall in the interest rate would bring down the EMI to Rs 42,603 and the total interest paid to Rs 52,24,788. A 50 bps rate cut, on the other hand, 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 rate cut.
For the existing borrowers, the rate cut would take time to reflect until the next reset period if they are on MCLR. However, the change in the interest rate would be seen in the reduced tenor and not the EMI though until you decide to refinance your loan. So far as the existing customers on the base rate are concerned, they may want to consider switching to MCLR-linked loans that are more responsive to rate cuts.
“Customers already under the MCLR scheme will have to wait until the next reset period after the banks revise the MCLR to see the revised interest rate reflected in their loan. Those who are on the base rate should consider switching to the MCLR. There is still a difference of 100 to 150 bps between the base rate and MCLR, and a reduction of 1-1.5% on your loan can mean significant savings,” says Shetty.
Thus, old borrowers under the MCLR regime would have to wait until the next reset period to get the rate reset. Normally MCLR-based home loans are reset once a year. However, if the loan rate charged to them is higher at the existing lender, they can think of switching the loan portfolio to another lender that would take over the outstanding balance at a lower rate of interest. “If the gap of interest rates between the existing and new lender remains more than 1% or so, it would make sense to switch the loan. On the other hand, base rate customers can switch to the MCLR regime to take advantage of the lower rates. It may incur a switchover fee of around Rs 5,000-20,000. However, the overall interest would reduce substantially with the said option,” informs Mehra.
If you also want to switch to a home loan with a lower interest rate, you have broadly two options. One is to transfer your loan within your own bank or HFC. This may carry minimal charges and little to no paperwork. You can also bargain for the rates with your housing finance company. Another option is to transfer your loan to another bank. This would involve a little bit of paperwork and need you to incur costs such as processing fee, loan balance fees etc. You should, however, make a thorough assessments of your costs before making the transfer.