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RBI REPO Rate Cut: What to Expect from this Announcement

  • Highlights

  • Following a slide in inflation, the RBI has reduced the repo rate by 25 basis points to 6.25%

  • The Reserve Bank also changed its monetary policy stance to neutral

  • This announcement may cause lenders to lower loan interest rates

In a surprising move, the 6-member Monetary Policy Committee (MPC) headed by Governor Shaktikanta Das lowered the repo rate by 25 basis points to 6.25%. This is the first repo rate cut since August 2017.

The repo rate is a tool that the RBI uses to control the flow of money in the economy. Thus, a repo rate increase or decrease affects the cost of funds available within the economy. So, the repo rate decrease has implications for your home loan interest rate. Here’s a look at what awaits new and existing homebuyers.

The potential impact of the repo rate cut on home loan EMIs

Following the RBI repo rate cut, banks, NBFCs and other lenders may lower the interest rate on home loans as well as other loans. This is because most lenders determine the interest rate on loans using the Marginal Cost of Funds Based Lending Rate (MCLR), which takes into account changes in the repo rate.

Thus, if the lender chooses to pass on this rate cut benefit to borrowers, it is likely to lower the EMIs on your home loan.

Let’s illustrate this with an example. Say you take a home loan of Rs. 70,00,00 for a tenor of 20 years at 8.8% interest. Your present EMI will be Rs. 62,083 per month. Now, taking into consideration the 25 basis points reduction in interest rate, your new interest on the same loan will be 8.55%, which brings your EMI down to Rs. 60,969. This means you save approximately Rs. 13,368 in a year.

However, this is dependent on lenders reducing the interest rate in accordance with the cut in the repo rate, which may or may not happen.

RBI cuts repo rate cut by 25 basis points

What is the repo rate and what happens when it decreases?

The interest rate at which the Reserve Bank of India lends money to commercial banks is called the repo rate. Repo rate is often used by the financial authorities of the country to control inflation, by controlling the supply of money.

Repo rate has a direct effect on the rate at which banks and other financial institutions lend money to the common people. When the repo rate is higher, the cost of borrowing is higher for banks, and when it is lower, the cost of borrowing decreases correspondingly.

When the RBI needs to put more money into India’s financial system, it decreases the repo rate, which leads to a decrease in the rate at which banks lend to customers. This makes it easier and cheaper for entities to borrow funds for various purposes. As a result, the economy receives a boost and begins growing faster.

How the rate cut will fare in the external benchmark regime

The repo rate cut declaration comes at a time when borrowers and lenders were preparing to accept the new external benchmark system. So, 1st Aril 2019 onwards, banks will need to determine the interest rate on loans, including home loans, in a more transparent way by using any of the following benchmarks:

- Repo rate of the RBI
- The government of India’s 91 days treasury bill yield produced by Financial Benchmarks India Private Ltd (FBIL)

- The government of India’s 182 days treasury bill yield produced by FBIL
-Other benchmark market interest rates produced by FBIL

If banks follow the repo rate to determine your loan’s interest rate, then the interest rate may fall. This will make borrowing easier on the pocket. However, keep in mind that if you have an existing floating interest rate home loan, you will enjoy the benefit of lower rates only when your reset date comes around. This, in most cases, happens every 6 or 12 months.

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