The Reserve Bank of India (RBI), in its latest bi-monthly monetary meet held on April 7, 2021, has decided to keep the repo rate unchanged yet again. This is the sixth time in a row the apex bank has kept the key rates unchanged.
The repo rate and reverse rate remain at 4% and 3.35%, respectively, after the announcement. No change in the repo rate was expected as the central bank is expected to tame the yields of government securities due to higher borrowings planned by the government in FY 2021-22.
With repo rate being at the lowest level seen in the last two decades, a continuation of this low interest rate regime works well for the borrowers. “Home loan interest rates in India have been the lowest in the past couple of years and this has led to a significant recovery in transactions in all classes of housing - affordable, mid segment and luxury. As the apex bank has kept the rates unchanged, we expect housing demand to continue its upward trajectory in 2021, and the overall positive economic indicators shall further help home buyers to close and finalize" said Ankush Kaul, President (Sales & Marketing) - Ambience Group.
However, for FD investors it will only increase their woes. Here's what FD investors and borrowers can do after today's announcement.
A glimmer of hope for debt investors
After continuously cutting interest rates, some banks have started increasing rates of longer-term FDs. For example, in December 2020, Canara Bank raised the interest rate on FDs with tenures of 2 to 10 years. With effect from January 8, 2021, SBI has hiked the interest of FDs with tenure of more than one-year but less than two years. SBI has not cut the interest rate on FDs since September 2020. This is after RBI kept key policy rates unchanged since its August 2020 bi-monthly monetary policy.
"We expect 10year yields to inch higher, possibly trade in the range of 6.2-6.25% in the near term, as there are concerns over stubborn core inflation, resurgent COVID infections, renewed localized lockdowns and relatively higher sovereign yields in US" said Amar Ambani, Senior President and Head of Research – Institutional Equities, Yes Securities.
However, it is too early to expect any meaningful increase as these investors may have to wait a little longer to see any significant hike in interest rates on FDs.
"The move to introduce G-SAP – secondary market GSec acquisition program is a master stroke by the RBI. This would reign in sharp spike in GSec bond yields. Introduction of long term VRRR (variable rate reverse repo) is an extension towards normalising liquidity. Liquidity surplus however will and is likely continue. We expect yield curve to flatten from the current levels with the longer end of the yield curve compressing faster than the short end” said Lakshmi Iyer, CIO (Debt) & Head Products, Kotak Mutual Fund.
This is why conservative investors should look for alternatives to bank FDs if they want higher returns. As per financial planners, mutual fund investors should get ready for low returns from debt mutual fund schemes as the rally in the returns is coming to an end. Read on to know what debt mutual fund investors should do?
Apart from FDs and debt mutual funds, investors have the option of investing in small savings schemes. The government has kept interest rates on these schemes unchanged in the last quarterly review as on March 31, 2021.
Also Read: Latest post office schemes interest rates
Other alternatives to FDs are Pradhan Mantri Vaya Vandana Yojana (PMVVY) and RBI Floating Rate Savings Bonds, 2020. Do keep in mind that PMVVY offers fixed interest rate throughout its tenure, whereas the interest rate on RBI's floating bonds is reset every six months. The reset date of interest rate of RBI floating rate savings bonds is July 1, 2021.
Existing home loan borrowers
A) Loans linked to external benchmark
Borrowers whose home loans are linked to an external benchmark are likely to pay the same EMI for now unless their bank reduces its margin or spread on the loan interest rates. On the other hand, if your bank raises the risk premium on your loan account, then the EMI on your home loan is likely to increase.
B) Loans linked to MCLR
A bank's marginal cost-based lending rate (MCLR) is determined by both internal factors such as cost of funds and external factors such as repo rate etc. Thus, any further change in the MCLR will now depend on bank-specific internal factors like cost of funds etc.
Usually, home loans linked to MCLR come with a reset period of either one-year or six months. Thus, even if your bank reduces its MCLR now, the reduction will result in lower EMIs only when the reset date of your home loan arrives. On the reset date, your future EMIs will be calculated based on the interest rate prevailing on that date (i.e., reset date).
In September 2020, SBI announced, via its official Twitter handle, that it had reduced the MCLR reset frequency from one year to six months for loans given by it. This means that any policy rate changes will be transmitted faster to SBI's home loan borrowers.
MCLR linked loan borrowers also have the option to switch to a loan linked to an external benchmark. The switch can be done by paying an administrative fee as set by the bank.
C. With loans linked to base rate or BPLR
Borrowers whose home loan is linked to the base rate or Benchmark Prime Lending Rate (BPLR) should consider switching to an external benchmark-based loan. The new lending rate regime offers better transmission of RBI policy rates in comparison with the base rate and BPLR rate-linked loans, as per financial planners and industry experts.
With effect from March 10, 2021, SBI's BPLR is at 12.15% and base rate is 7.40%. However, the bank's repo rate-linked loan interest rate starts from 7% (for a male, salaried borrower).
If you have a floating rate home loan and are currently paying a higher interest rate under BPLR or base rate, it is better for you to shift your loan to an external benchmark linked loan to enjoy the current lower rates.
New borrowers
For new borrowers, now appears to be a good time to take a home loan as the interest rates are low. However, with the on-going pandemic there are other factors you should consider as well. For this read: Answer these 8 questions before taking home loan
Further, to get the lowest interest rate do check and compare the margin and risk premium charged by banks over and above the external benchmark.
Do keep in mind that not all banks have chosen the repo rate as an external benchmark. Some banks have linked the interest rate on loans to certificate of deposit rate, treasury bills interest rates etc. Remember, as per RBI guidelines, loan interest rates can be linked to any of these external benchmarks:
(a) RBI's repo rate
(b) Govt of India 3-month Treasury bill yield published by Financial Benchmarks India Pvt. Ltd
(c) Govt of India 6-month Treasury bill yield published by Financial Benchmarks India Pvt. Ltd
(d) Any other benchmark market interest rate published by Financial Benchmarks India Pvt. Ltd
New borrowers need to keep in mind that external benchmark-linked interest rates are likely to be more volatile compared with MCLR linked rates. This is because changes in the external benchmark - both increases as well as decreases -- are transmitted faster than via interest rates linked to MCLR.
