The Reserve Bank of India has cut the interest rate for the second consecutive time by a fourth of a percentage point, taking the applicable rate to 6%.
How to make good of this falling interest rate regime is the immediate question that comes to the mind of every borrower.
Here are a few tips to make the easy money policy of the monetary authority lighter on your wallet:
With the monetary policy stance also getting changed to accommodative from neutral, it’s clear that we are in for an easy money regime going forward, of course if there are no shockers, both external and domestic, as Reserve Bank governor Sanjay Malhotra had indicated on April 9 while announcing the first monetary policy review of the new fiscal. This is a great relief for the economy as a whole, and not individual borrowers, as the rates have been really high at 6.5% for almost five years now.
However, before we look at how the EMIs can be a lesser burden on your wallet, we should also remember that a falling interest rate regime also means, the interest you earn on your deposits will also be falling going forward.
While any existing loan priced on the EBLR (external benchmark--read repo rate--linked lending rate) will be automatically reduced in the similar quantum as the repo rate reduction, the interest rate reduction on deposits will not be automatic and your existing deposits will not be affected—which means that an interest rate committed to your fixed deposits cannot be reduced.
Where banks will be hitting you will be when you go to them with a new deposit—large banks like the State Bank of India, HDFC Bank and Bank of India, among others have already announced reduction in new fixed deposit rates.
This is understandable too, as the margins have been falling with higher deposit rates and falling loan rates. The biggest beneficiaries will be existing home and auto loan borrowers and many expect home loan prices falling to around or under 8% now—a first in two years.
How to get EMIs reduced?
While all EBLR loan rates will automatically be reduced with the repo rate cuts, those on the fixed rate will not get the benefits automatically.
So if your loan is on a fixed rate, walk down to your home branch and reprocess your loan rate by paying a nominal processing fee.
It will be better to change the terms of your loans along with this repricing—from fixed rate to floating rate, as in all likelihood, we are in for an easy money regime.
If your finances are not bad, you can keep the EMI at the current higher rate and choose to lower the tenure of the loan. A 50 bps rate reduction from say 9.5% to 9% or even lower, should ideally reduce your loan tenure by at least 10 months.
If your bank is not giving you the best pricing, you can approach another bank and get your home or auto loans transferred and bargain for the lowest prices.
Analysts are expecting the home loan rate to fall below 8% mark for the first time in many years if not for the entire system but for large banks like SBI and HDFC Bank.
Ideally all the credit pricing, including credit cards, which now hover around 3.95% per month, should fall in a falling interest rate regime.