The Reserve Bank of India (RBI) will announce its first bi-monthly monetary policy decision of the new financial year on April 9. In the previous meeting of the RBI’s Monetary Policy Committee (MPC) held in February this year, the apex bank’s rate-setting panel decided to cut the key benchmark rate by 25 basis points (bps), bringing it to 6.25%. Now again, it is widely expected that the RBI will slash the repo rate by a similar margin tomorrow.

In fact, SBI Research has predicted that the RBI will cut the repo rate by 100 bps in the current fiscal, starting with 25 bps in its April monetary policy review. If the central bank cuts the rate again tomorrow, borrowers can then expect the banks to pass on the benefits of two cuts to them sooner or later. Most lenders, however, are yet to respond to the 25 bps rate cut effected by the RBI in February.

In the past, banks have shown some hesitancy in passing the repo rate cut benefits onto retail borrowers, so it will be interesting to see how lenders, especially major ones, respond to tomorrow’s policy decision. But if banks cut their rates by around 50 bps after the RBI’s repo rate cut tomorrow, this will give a big relief to home loan borrowers who have been paying high interest rates for some years now.

Also read: RBI MPC Meet: Rate decision on April 9 — When and where to watch Monetary Policy Meeting?

How much difference will it make in EMI?

Now think, if someone has taken a home loan of Rs 50 lakh, the tenure of which is 20 years and the interest rate is 9%, then his EMI becomes around Rs 44,986.

If the bank passes the full 0.50% cut and the interest rate comes down to 8.5%, then his new EMI will be around Rs 43,391. That means saving Rs 1,595 every month, about Rs 19,140 in a year, and relief of more than Rs 3.8 lakh on the entire loan.

On RBI’s possible rate cut and the prospect of banks lowering their rates for home loan borrowers, Kunal Varma, CEO and Co Founder of Freo, said, “Yes, home loan borrowers, particularly those with floating interest rates tied to the RBI’s repo rate, can look forward to a cut in their EMIs if the RBI cuts by another 25 bps.”

Varma also explained why banks are a bit hesitant in passing on the full benefit of the previous rate cut to home loan customers. He said banks need not transfer the entire benefit of a reduction in RBI repo rate to borrowers owing to various factors:

Cost of Funds: Banks’ lending rates are affected by their own cost of funds, for instance, the interest paid on deposits and other borrowing. Banks would be hesitant to cut lending rates proportionally where costs are high.

Benchmarking Techniques: Loans that are based on the Marginal Cost of Funds-based Lending Rate (MCLR) can have slower rate transmission than those based on direct external benchmarks such as the repo rate. This is due to the fact that MCLR is driven by the internal cost structures of a bank.

Also read: RBI MPC meet begins today: Economists predict 25-35 bps cut on growth concerns, cooling inflation

Profitability Considerations: In order to preserve their margins, banks may opt to retain a share of the benefits of the rate cut, particularly in a competitive market scenario

On whether borrowers will see a 50 bps cut (cumulative of the two cuts) by banks, or will the adjustments be less than expected, Varma said while a general cut of 50 bps in the repo rate may point towards an equivalent implied drop in loan interest rates, the extent of change on the ground could be lower for borrowers. “That is due to reasons discussed earlier, such as banks’ cost of funds as well as in-house guidelines. The transmission of rate reductions can also be sequential. For instance, following a prior 25 bps repo rate reduction, certain banks cut their home loan interest rates by merely 5 bps to 10 bps at first. Thus, borrowers can expect some ease, but it may not be in line with the full amount of the RBI’s rate cuts at first blush.”

World conditions can also have an impact on RBI policy

The recent tariff tantrum by US President Donald Trump has shaken the global stock market, crude oil and commodity markets. In such a situation, there is also a possibility of inflation rising.

If the price of crude oil rises, then inflation in the country can also go up. And when inflation rises, RBI may have to keep interest rates stable or increase them instead of reducing them. That is, it may be difficult to expect continuous rate cuts in the future.

Summing up

The news of repo rate cut is definitely a relief, but when and how much you will get its benefit, it completely depends on the decision of the bank. Also, if there is turmoil in the global market, then it will not be easy for RBI to continuously cut rates.