Your home loan, car loan EMIs may come down soon despite no rate cut by RBI

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February 06, 2020 5:31 PM

The RBI paused the rates for a second straight time and announced measures that would boost real estate, automobile, banks and bonds.

credit policy, RBI, repo rate, home loan, car loan, EMI, interest rates, Even without cutting the repo rate, the RBI has taken a step to keep interest rates subdued.

The Reserve Bank of India paused policy rates in its second straight Monetary Policy Review today. The repo rate, the rate at which commercial banks borrow from the central bank, remains at 5.15%. This means that loans recently disbursed by commercial banks will not revise their interest rates for now. Therefore, your repo-linked car loan or home loan EMIs are going to be constant for now. Due to stronger inflation caused by food prices, an immediate repo rate cut seemed out of question. However, RBI governor Shaktikanta Das did say that there’s room for further cuts in the future assuming inflation softens and remains tame.

Though the RBI didn’t cut rates, it did announce measures that would have the same effect on deposit and loan interest rates around the country. The Monetary Policy Committee has several tools in its kitty to influence policy rates, and the repo rate is just one of them. Since a repo cut wasn’t in order, the MPC decided to focus on improving lending by making tweaks to the Credit Reserve Ratio (CRR) and repo tenures.

Lower CRR Requirement Means More Liquidity

The CRR is the percent of its cash deposits at any point that a commercial bank must maintain with the RBI. Commercial banks don’t earn interest on these deposits. The CRR currently is 4%. The RBI has now said that new retail and MSME loans disbursed till July 31, 2020, will be adjusted against a bank’s CRR requirements while ensuring that banks meet at least 90% of their CRR requirements. This would free up the banks to monetise more of their liquidity. This, over the next few months, should soften interest rates further. Therefore, even without cutting the repo rate, the RBI has taken a step to keep interest rates subdued. This move would be welcomed by both banks and customers.

Move To Long-Term Repo To Also Soften Yields & Borrowing Rates

Secondly, the RBI is seen moving from overnight repo to long-term (one-and three-year repo) rates. This would be a fresh liquidity infusion by the RBI to the tune of Rs. 1 lakh crore at the repo rate, which is currently 5.15%. Over time, the yields from government securities, which are currently in the 6% range, should bend towards 5.15%. The move is expected to soften yields, lower deposit rates and pull down lending rates with it. Again, this is a positive development for banks, customers, and bond investors.

Boost To Real Estate & Auto

Relaxation of CRR norms would ensure that greater financing is available for car and home buyers as well as MSMEs. The RBI recognized the role of key sectors in boosting economic growth, saying that stimulating those sectors can have a multiplier effect on economic growth at large. The RBI has accommodated stressed real estate projects that are struggling to reach completion, by ensuring their asset classification is not downgraded for another year. Funds will be available for the completion of stressed projects, thus also allaying the fear of banks about such projects becoming NPAs.

Medium Enterprises To Benefit From Repo-Linked Loans

Last year, the RBI asked banks to benchmark all retail loans (home, car, and personal loans) and loans to micro and small enterprises to external benchmarks such as the repo rate. This is one of the several moves that the RBI has taken over the years to ensure better transmission of monetary policy. Today, the RBI said that loans to medium enterprises, too, would be linked to external benchmarks. Thus, those enterprises would also benefit from cheaper loans.

These measures, along with the several others announced in this bi-monthly policy review, are expected to stimulate growth for real estate, automobiles, and MSMEs. Credit access is key to driving economic growth, and the latest announcements taken along with the proposals in the Union Budget, can accelerate growth again.

(The writer is CEO, BankBazaar.com)

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