MUMBAI: Interest rates are falling. Your monthly EMIs on home, auto or personal loans will be lighter on the pocket, but term deposits will fetch lower returns.
Ending all handwringing on high interest rates, the country’s policy rate-setter RBI gave what everyone wanted, rather generously, by slashing repo rate by 50 basis points (bps) on Tuesday. Taking up the baton, State Bank of India (SBI) and Andhra Bank revised base rates to 9.3 and 9.75 per cent respectively. More banks are now set to join the rate war.
Amid RBI lowering the GDP growth forecast to 7.4% for the current fiscal, Finance Minister Arun Jaitley said that the Centre will reassess its GDP projections.
For a Rs 25 lakh home loan with a 20-year tenure, every quarter per cent reduction leads to monthly savings of about Rs 400 and approximately Rs 1 lakh in total interest outgo (see table). The RBI’s 125 bps reduction so far will save roughly Rs 5 lakh in total interest. RBI governor Raghuram Rajan modestly said Tuesday’s 50 bps reduction was not a Diwali bonus. But it surely will be one, if banks transmit all 125 bps to customers.
Existing borrowers under floating interest will benefit from any base rate changes with immediate effect. But those under fixed rate or under Benchmark Prime Lending Rate — banks replaced this with base rate in 2010 — will continue to cough up existing EMIs.
For humble household savers, it is bad news, as deposit rates are first cut and significantly at that. The 75 bps repo cut between January and July led to a more than 50 bps cut in deposit rates.
Worse, the government is considering reducing small savings rates like Provident Fund and Post Office Savings (currently 8 per cent interest). Analysts say equities with a 2-3 year time frame may offer more competitive returns than traditional deposits.
Meanwhile, by trimming repo rate, Rajan has put the onus squarely on us — consumers — to prop up growth. According to RBI, fewer of us are buying homes, two-wheelers and tractors. Some of us are buying TVs, ACs, but this simply isn’t enough.
“More domestic demand is needed to substitute for weakening global demand, so that domestic investment cycle can pick up,” he said. So the latest repo reduction is not totally out of whack, as lower rates will push consumer spending.
Real estate, which has been witnessing subdued demand will see some sales uptick. For developers, cost of borrowing will decrease marginally. In affordable housing, the RBI eased lending norms and proposed to reduce risk weightage applicable to lower value but well collateralised individual housing loans.
Should I Take a Loan?
Opt for a floating rate. Existing borrowers may consider revisiting home loan plan, if the difference in the current and new interest rate is at least 2 per cent. Interest rates on two- and four-wheelers too are set to fall; deep discounts could be round the corner, thanks to the festive season and you could get the best deal.
Should I Save Money?
If you have spare cash, now is the time for a term deposit. Over the next few days or weeks, deposit rates will go southwards. If you’re not too happy with traditional bank deposits, shop around for PPFs, Post Office Savings and other small savings schemes before their interest rates are slashed. If you have a higher appetite for risk, consider equities, mutual funds of shorter tenures, ideally 2-3 years.
What Will Companies Gain?
Companies will have access to cheaper loans, corporate investment will pick up. Auto sector sales likely to go up 15-20 per cent. Merchandise export likely to pick up.
Policy Move Augurs Well for growth
The RBI has taken a definite move from the monetary policy standpoint with this rate cut. The question is how effective will this be in reigniting growth. Two issues need to be addressed. The first is the transmission mechanism which the RBI has stated will be discussed with the government. The second is growth per se. Will growth revive in a significant manner, asks Madan Sabnavis, chief economist at Care Ratings.
Pleasant surprise For all markets
The rate cut was indeed a pleasant surprise for markets. The surprise element for V G Mathew, MD and CEO, South Indian Bank, came from the fact that recent RBI pronouncements on inflation and growth led the markets to anticipate a hawkish stance.