Home >Money >Personal Finance >How RBI rate cut could impact your loan EMIs
Even if banks reduce the MCLR, the effect will be visible in your loan only from your next reset date.
Even if banks reduce the MCLR, the effect will be visible in your loan only from your next reset date.

How RBI rate cut could impact your loan EMIs

  • With the RBI cutting the benchmark repo rate, retail consumers expect a reduction in EMIs. But that may not happen anytime soon
  • RBI has deferred the proposal to link retail loan rate to an external benchmark that would have made transmission more dynamic and transparent

As widely expected by bankers, economists and the markets, the Monetary Policy Committee of the Reserve Bank of India today recommended a rate cut of 25 bps in the benchmark repo rate of the RBI. With this rate cut, the repo rate will stand at 6%. In February, the repo rate was cut by 25 bps from 6.50% to 6.25%.

The expectation of a rate cut has been based on a lower inflation rate as well as slower growth in the economy. How does this change in the repo rate impact borrowers? We take a look

Lending rates

With the RBI cutting the benchmark repo rate, retail consumers expect a reduction in EMIs. But that may not happen anytime soon. There are two reasons for this. One is that the floating rate retail loans like home loans are given on MCLR and MCLR does not come down proportionately in comparison to the repo rate. This is because the cost of funds of a bank also includes deposit rates, which are not dropping proportionately either. Hence we have seen banks reducing MCLR rates only marginally.

The other reason is that your home loan has a reset date, from which a new rate comes in to effect. Typically, this reset happens once in a year. So even if banks reduce the MCLR, the effect will be visible in your loan only from your next reset date. For instance, if someone has a home loan based on 1-year MCLR and reset date in January, she would see an impact in her interest rates only in January next year, even though the RBI reduced repo rate twice and some transmission in MCLR rates is taking place. So don’t expect a rate cut by your bank anytime soon. Further it’s also important to note that RBI has deferred the proposal to link retail loan rate to an external benchmark that would have made transmission more dynamic and transparent. In the press conference the RBI Governor Shaktikanta Das said that they would need further consultation on the matter.

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