With the Reserve Bank of India (RBI) cutting the repo rates by 40 basis points (bps) to 4%, the interest rates on home loans may come down for existing as well as new borrowers whose loans are linked to an external benchmark. But a cut in policy rates will also mean reduction in the interest rate on fixed deposits.
What borrowers can expect
External benchmark-linked loans: Effective 1 October 2019, all new retail loans are linked to an external benchmark and most banks have chosen the repo rate as the benchmark. RBI has made it mandatory for banks to reset home loan interest rates under the external benchmark at least once in three months.
So, if you took a loan after 1 October, you can expect your equated monthly instalments (EMIs) to go down whenever your next reset triggers as your floating home loan interest rate will fall by 40 bps. One bps is one-hundredth of a percentage point.
New borrowers will be able to get loans at a lower rates as and when banks implement them.
MCLR-linked loans: If you loan is still linked to the marginal cost of funds-based lending rate (MCLR), the rate cut may not result in immediate fall in the EMIs.
Under the MCLR regime, banks can have a different reset periods ranging from three months to one year. The majority of lenders have an annual reset clause for home loans. Therefore, how much and when the interest rate on MCLR-linked loans would fall will depend on the reset date and on how the cost of funds reduces for each bank following RBI’s policy measures.
“MCLR is linked to deposit rates and is decided by the banks themselves. Hence the movement in MCLR is not always direct and immediate. In order to protect their margins, banks will be slow to change MCLR. Also the reset period in MCLR benchmarked loans is longer than in case of repo rate linked loans," said Gaurav Gupta, CEO, Myloancare.com.
Therefore, experts are advising borrowers who are still on the MCLR regime and those who have loans with non-banking financial companies (NBFCs) and housing finance companies (HFCs) to move to the new benchmark-linked regime. “NBFC and HFC borrowers may not benefit from this cut as these loans are not linked to the repo rate. The availability of funds and the cost of funds for these lenders is also a challenge and, hence, they may not be able to reduce rates. Hence, borrowers should look to move to an external benchmark," said Gupta.
What depositors can expect
The repo rate cut will also result in a fall in the interest rates on FDs.
“Banks are sitting on liquidity with large deposits in savings accounts and FDs. They are paying interest but not earning interest. This mismatch can’t continue for long," said Aditya Mishra, CEO, Switchme.in.
“With lending rates reduced, banks have to reduce FD rates to bring down their cost of funds," said Gupta.