The Reserve Bank of India made an unconventional 35 basis point cut in the repo rate and also took a slew of other decisions.
The Reserve Bank of India made an unconventional 35 basis point cut in the repo rate, bringing it down to 5.40%, the lowest it has been since early 2010 when the global economy was coming out of recession. With this cut—the fourth straight one—the repo rate has reduced by 110 basis points from 6.50% at the start of 2019. A slew of other decisions were also announced by RBI governor Shaktikanta Das. Let’s look at the key takeaways for the common man.
Lower Interest Rates On Loans
Between February and June 2019, the RBI said banks had brought down the weighted average lending rates (WALRs) on fresh rupee loans by 29 basis points. In the same period, the RBI had reduced the repo rate by 75 basis points. Therefore, a lot more needs to be done in terms of transmission of the policy rate to end consumers who continue to pay high interest rates on their loans. With a fresh cut, and assuming the same rate of transmission, borrowers can expect a cut of around 10 basis points on their loans. This will bring down their EMIs marginally.
No Sign Of External Benchmarking
In December, the RBI had mandated banks to link floating rate loans to external benchmarks such as the repo rate. This had to be done by April 1, 2019. So far, only the SBI has announced a repo rate-linked home loan while the rest of the banking industry has asked for more time. External benchmarks were suggested by the RBI to make rate cut transmissions more efficient. Governor Das said banks are coming out of a perilous period with slow deposit growth. He said the RBI is monitoring the situation and is in consultation with key stakeholders, and therefore the switch to external benchmarks is on hold. Consumers, however, will hope that this switch happens fast.
Impact On Deposits & Small Savings
Typically, deposit interest rates track the repo rate. This hasn’t been the case in 2019. At the start of 2019, the State Bank of India had a one-year Fixed Deposit interest rate of 6.80%. By the end of July, the same deposit offered 7.00%. In the same period, the repo rate had come down from 6.50% to 5.75%. In order to attract depositors, banks haven’t reduced deposit rates. With the latest repo rate cut, the deposit rates may lower marginally, but this remains to be seen. The same story plays out with small savings schemes whose interest rates are revised on a quarterly basis. So far, returns on small savings schemes have lowered marginally. Public Provident Fund, for example, offered 8.00% per annum between January and June, but for the July quarter the rates across small savings schemes were lowered by 10 basis points. Since the next rate revisions will be announced only around the end of September, the rates may be revised basis the prevalent macro scenario at that time.
Impact on Debt Funds
Long-term debt mutual funds are making merry as they do when interest rates fall. The one-year category returns on medium to long-term range between 9% and 19%. These are attractive returns at a time the equity markets are taking a hammering. The one-year returns on large cap equity mutual funds are around -4%. Is this a good time to get into long-term debt funds, then? The answer lies in your risk appetite. Long-term debt funds are volatile and they will take a hit once interest rates start rising again. The best way to invest in these funds would be through small amounts via SIPs for better rupee cost averaging. While picking these funds, you should also have a long-term horizon of 3-5 years so that you can make the best of the market cycles.
Keeping in line with boosting digital payments, the RBI announced that from December, you’ll be able to conduct National Electronic Fund Transfer (NEFT) transactions 24×7. In the last policy review in June, the RBI had announced a waiver of transaction charges on NEFT as well as Real Time Gross Settlement (RTGS) transactions. Several banks have already waived off charges on these two payment platforms and we’ve seen a broad down-trending of charges on electronic transactions across the board. This will encourage more people to use them instead of cheques, demand drafts and certainly cash.
Lastly, the RBI has taken steps to make it easier for banks and lending institutions to lend. The risk weight for consumer credit for personal loans has been reduced from 125% to 100%. What is risk weight? Basically, the RBI mandates banks to hold capital in proportion to the amount lent. So for personal loans and credit cards, for every Rs. 100 lent, banks earlier had to hold Rs. 125 in assets to reduce risks of insolvency. Now, for personal loans, this requirement is less stringent. Governor Das also said that while the GDP projections are lower at 6.9% for 2019-20, the current economic pains are cyclical and not structural – and that growth should return soon. Investors and industry watchers will cheer this view.
(The writer is CEO, BankBazaar.com)