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Opinion | RBI rate cut impact on borrowers and depositors

  • The RBI, on Thursday, reduced its benchmark repo rate by 25 bps to 6.25%.
  • While it is good news for borrowers, depositors may feel the heat

The Reserve Bank of India (RBI), on Thursday, reduced its benchmark repo rate by 25 bps to 6.25%. While it is good news for borrowers, depositors may feel the heat. Usually, when there’s a rate cut, banks don’t immediately reduce lending rates whereas deposit rates see a fast change. But some experts are of the view that the situation may change this time around since the growth in deposits has slowed down. But some say it may take a while for the changes to reflect. According to financial planners, there is a possibility of another rate cut; so locking up funds in FDs can be done but not for a tenure of more than 2 years. Beyond that, debt funds are a better option. Existing borrowers are set to benefit at the time of interest rate reset which may take a few months but once that happens, lending rates could become more attractive. However, economists say, Thursday’s announcement wouldn’t really do much unless there are subsequent rate cuts. Will this rate cut actually transition into a change in lending and deposit rates? Four experts share their views on what this means for first-time and existing borrowers and depositors.

Fixed Deposits okay but only for a tenture of 2 years

Shweta Jain, CEO, Investography
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Shweta Jain, CEO, Investography

Shweta Jain CEO and founder, Investography Pvt. Ltd

For people to actually gain from the repo rate cut that was announced on Thursday, banks and other lenders need to pass on the benefit to their customers at the earliest. From what we’ve seen over the years, this is usually not done very promptly by banks. So, a 25 bps cut is good for infusing liquidity in the system and it will encourage consumption, which is a positive sign. The rate cut also means that inflation is lower than anticipated and is pegged to reduce in the near future too which is good for consumers.

For existing borrowers, it doesn’t really mean much as benefits are not passed on swiftly by banks; so they’ll have to wait before some real change is seen. New borrowers should ensure they are able to use this to their benefit. Negotiating with the lender before taking the loan is a good way to do this. Depositers should take note that there could be another cut too, so locking up funds in fixed deposits can be done but only for a tenure of two years and not longer. For a three-year horizon, debt funds would be a better option.

RBI measures to ease NBFCs’ funding constraints

Dr. Rupa Rege Nitsure, L&T Finance Holdings
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Dr. Rupa Rege Nitsure, L&T Finance Holdings

Dr. Rupa Rege Nitsure, Group Chief Economist, L&T Finance Holdings

The monetary policy action reflects the RBI’s apt response, not just to the considerations of ‘price stability’ but also to that of ‘financial stability’.

It is not just the repo rate cut or the assurance on liquidity front that would help the retail or corporate borrowers but a plethora of regulatory measures to ease the funding constraints for NBFCs should revive the sagging investment climate.The repo rate cut would certainly influence many benchmark rates and in turn, feed into the actual borrowing cost for the first time (new) retail and MSME borrowers. The existing borrowers will benefit at the time of interest rate reset.

The important steps taken by the RBI like linking the risk weights on bank borrowings to the actual ratings of NBFCs, relaxation in foreign portfolio investments (FPI) limits investing in corporate bonds (fixed at 9% of outstanding stock), etc. would increase the fund flows to well-rated NBFCs at reasonable costs and help them lend to retail borrowers or MSMEs at competitive rates.

Interest rates to be more attractive for new borrowers

Shyam Sekha, iThought
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Shyam Sekha, iThought

Shyam Sekha, Chief ideator and founder, iThought

One of the functions of the RBI is to contain inflation and facilitate growth. It could achieve this objective by tinkering with the repo rate (the rate at which banks borrow from the RBI). As an investor, it is important to know that the repo rate influences the rates at which we borrow from banks (home loans, vehicle loans, etc.) and the rates at which we lend to banks (through fixed deposits).

In its recent policy meeting, the RBI cut the repo rate by 0.25%. This effectively means that banks will now borrow from you at a lower rate. Fresh fixed deposits will be issued at a rate lower than those of last few months. However, for those who invested in FDs in the past, there will be no change to your returns. Moving on to loans, interest rates on floating interest loans may reduce while fixed interest loans remain the same. For those looking to borrow, rates may become more attractive now. The RBI will expect banks to transmit the rate cuts to consumers and we should see aggressive messaging from the finance ministry in the coming weeks. After all, it is the election season.

Lending rates unlikely to change significantly

Rajni Thakur, RBL Bank
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Rajni Thakur, RBL Bank

Rajni Thakur, Economist, RBL Bank

Repo rate is the rate at which RBI lends money to commercial banks. Along with reverse repo rate, it is a part of liquidity adjustment facility.

So while a repo rate cut might increase liquidity in the financial system, it’s not directly linked to lending or deposit rates of banks. Lending or deposit rates of banks are decided on various factors that together determine the cost of funds to the banks.

The banks thus have a discretion of passing on the rate cut to the borrowers, first time or otherwise, if it makes a difference to their cost of funds.

A 25 bps repo rate cut is unlikely to make significant difference to banks’ cost of funds and hence to their lending or borrowing rates. Only if the markets start pricing in further rate cuts in the year, it can potentially trigger a chase for new borrowers at lower rates and subsequent cuts in lending and deposit rates. For now, this particular rate cut would mean little for first time borrowers and existing borrowers and depositors.

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