In the month of May, the country’s largest bank, the State Bank of India (SBI), has brought about three major changes across its lending and deposit rates as well as in rules. Meanwhile, the RBI is expected to reduce its benchmark policy rate by cutting the repo rate in its forthcoming monetary policy meeting on June 6, 2019. The benchmark 10-year G-Sec yield which peaked ( over the last 12 months) at 8.18 per cent in September 2018 is currently at 7.17 per cent and is widely expected to come down further in the near future.
Even after two rate cuts of 25 basis points each by the RBI in 2019 so far, the lending rates are supposedly higher in the industry. The movement in the repo rate did not reflect in the movement of the lending rates and this had made the RBI announce that the lending rates of the banks should be linked to an external benchmark as against the practice of using Marginal Cost of Funds based Lending Rate (MCLR), which is the bank’s internal benchmark. This, however, didn’t materialize and the RBI had to keep the directive in abeyance till further notice. Only a few banks do have home loans linked to an external benchmark.
The idea was to link lending rates to an external benchmark. However, instead of linking the lending rates to an external benchmark, the SBI has linked the deposit rates to an external benchmark, the RBI’s repo rate. In doing so, this is the premise – In a falling interest rate scenario ( as and when repo rate falls) there will equal pressure on deposit rates to fall and with cost of funds coming down, the lending rates too will fall. In a falling interest rate scenario, this will help borrowers in terms of lower EMI’s while the reverse will happen when rates rise.
The new rates for the SBI, linked to the external benchmark rate are effective May 1. Savings bank interest rate for balances above Rs 1 lakh on or after May 1, 2019 will be 2.75 per cent below RBI’s repo rate i.e. 3.25 per cent. The RBI repo rate is currently at 6 per cent. Importantly, only deposits in savings account above Rs 1 lakh will be impacted and will carry a flexible interest rate. Savings account balance below Rs 1 lakh will continue to carry the fixed rate of interest of 3.5 per cent.
SBI has increased the fixed deposit rates on deposits of 1 year to less than 2 years while decreasing the rate slightly for other long term deposits. The new rate of interest is effective from May 9, 2019.
Here are the new rates:
The MCLR for the SBI was reduced by 5 bps across all tenors with 1 Year MCLR coming down from 8.50 per cent to 8.45 per cent. As a result, interest rates on all loans linked to MCLR got reduced by 5 bps with effect from May 10, 2019. This was the second rate cut in one month. After the April monetary policy meeting of the RBI, the MCLR of SBI was reduced by 5 bps. A lower MCLR will effectively mean a lower home loan interest rate and thereby, a low-interest burden for the borrowers, keeping other factors constant.
All eyes will now be on the RBI meeting early next month as the consensus is gaining strength for a 35 to 50 basis points repo rate cut. If that eventually happens, the stage will surely be set for a downward movement of the interest rate cycle for a long time to come unless crude oil and other external factors play spoilsport. For investors in FDs it could be the right time to lock-in fund while borrowers may wait for the rates to come down further.