As widely expected, the Reserve Bank of India kept the repo rate unchanged at 6 per cent in its October 4 monetary policy today. This was as per industry expectations as market analysts and financial experts were expecting a status quo in the October policy.
Earlier, HDFC Bank said that they expected the RBI to stay on hold on October 4th because the optics of headline inflation have started deteriorating. Thus, not only is inflation rising principally on the back of stronger food and fuel prices, and an unfriendly base effect, but it is going up at a more rapid pace than expected earlier. “Given our analysis, inflation is likely to cross the 4 per cent mark by November, stay around this level for the rest of the fiscal year, and then perk up further. So, going by RBI action as simply a response to inflation data flow and its extrapolation, there is no room for a rate cut, at least in October,” said Abheek Barua, Chief Economist, HDFC Bank.
The State Bank of India in its Ecowrap also said that they expected a status quo in the October policy. “On the eve of the forthcoming monetary and credit policy, the central bank is stuck in a conundrum of low growth, mild inflation, saving financialization and external uncertainties. This will make the job difficult for RBI on October 4,” it said.
Experts, however, said that some banks may still lower their lending rates going ahead as there are not too many takers for home loans now. As per the latest data released by the Reserve Bank of India (RBI), the growth rate of home loans looks to be tapering off. “For the quarter 21 July 2017, the home loan growth rate was 0.4% compared to 4.7% during the same period last year. The fall is more pronounced if compared y-o-y,” according to a research report by Knight Frank.
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.
For the existing borrowers, any rate cut takes time to reflect until the next reset period if they are on MCLR. Financial experts also advise the existing customers on the base rate to consider switching to MCLR-linked loans as they are more responsive to rate cuts.
“Customers should strongly go for MCLR-linked home loans as it reflects the true and correct picture of the prevailing interest rates in the economy as guided by the RBI, whereas the base rate does not signify anything, neither it gives the correct picture. Customers will get hugely benefited by MCLR-linked home loans in case of a falling interest rate regime as they get lower EMIs immediately,, which saves them interest cost as well as cash outflow,” says Rachit Chawla Founder & CEO – Finway Capital.
In terms of precaution, however, the customer needs to ensure that banks are not levying heavy processing charges, legal charges, swapping charges or any other hidden costs at the time of taking a MCLR-linked home loan.