The Reserve Bank of India (RBI) has yet again kept the key rates unchanged in its monetary policy review on February 6, 2020. With the central bank maintaining key policy rates, borrowers' EMIs may not come down further anytime soon unless the lending banks reduce their margins. On the other hand, fixed deposit (FD) investors can heave a sigh of relief as there will be no downward pressure on interest rates in the economy due to RBI's policy tweaks.
With no change in key policy rates, the repo rate currently stands at 5.15 per cent and reverse repo rate at 4.90 per cent. The Monetary Policy Committee has also decided to continue with the 'accommodative' stance as long as it is necessary to revive growth.
Here's how borrowers and FD investors will be impacted.
Impact on borrowers
- If loan is linked to an external benchmark
For now, borrowers with loans linked to an external benchmark will continue to pay the same amount of equated monthly instalment (EMI), unless there is a reduction in the spread (margin) by the bank.
- If loan is linked to MCLR
Since February 2019, the RBI has cut repo rate five times in a row by a total of 135 basis points (100 basis points/bps = 1 per cent). Banks, too, have cut interest rates on loans since then. However, the quantum has been much less.
Sample this: As per the MCLR data available on SBI's website, between February 2019 and January 2020, the bank has reduced the MCLR by 65 bps.
Unlike external benchmark linked lending regime, where interest rates have to be mandatorily reset at least once in three months, for MCLR-linked loans, the rates are decided by internal factors of the bank as well as the RBI's policy rates. Therefore, it is up to the bank to decide when to change its MCLR.
Further, the impact of a reduction in MCLR will only be felt once the reset date of your loan arrives. Usually, a bank offers MCLR-linked home loans with a reset period of six months or one year. Therefore, under the MCLR regime, the interest rate on a loan gets revised as per prevailing market conditions only on the loan's reset dates.
If you are servicing an MCLR-linked loan and want to switch to an externally benchmarked one, then as per the RBI circular, you can do it by paying administrative charges. While switching to a loan linked to an external benchmark, do check the spread and risk premium charged by the bank and compare these with those of other banks to know which one is offering a cheaper loan.
Also Read: Home loan interest rates linked to repo rate
Financial planners suggest that one should make a switch only if the interest rate difference between the two is 0.50 per cent or more.
Do keep in mind that loans under the external benchmark loan regime are subject to higher volatility as the interest rates charged on your loan will change more rapidly with changes in the external benchmark. This means when RBI hikes key rates, the interest rate of your loan will go up in tandem.
- If loan is linked to base rate or BPLR
Those borrowers whose home loan interest rate is still linked to the base rate or benchmark prime lending rate (BPLR) should consider switching their existing home loan to the external benchmark-based loan regime.
According to financial experts, external benchmark-linked loans come with more transparency in transmission of policy rates as compared to other rate-setting mechanisms.
What new borrowers can do?
Loans taken by new borrowers will now be linked to an external benchmark as mentioned above. Though the RBI has kept key policy rates unchanged, any rate cut by it in the future will bring down their EMIs.
If planning to take a home loan, eligible borrowers can also look at taking advantage of the Pradhan Mantri Awas Yojana (PMAY). The scheme offers credit-linked subsidy based on your annual income under its flagship programme 'Housing for All'. To avail this subsidy, there are some eligibility criteria that must be satisfied by you.
Middle income group-I (MIG-I) having household income between Rs 6 lakh and Rs 12 lakh can avail interest subsidy of 4 per cent whereas middle income group-II (MIG-II) having household income between Rs 12 lakh and 18 lakh will get interest subsidy of 3 per cent.
However, the subsidy is available only for loans taken under this scheme before March 31, 2020.
Also Read: Everything you need to know about PMAY
Impact on FD investors
Today's decision to maintain key interest rates would mean that any change in FD rates by the bank will be due to internal factors including the fund requirements of different banks.
The consecutive rate cuts by the RBI last year hit the returns earned by FD investors. Despite RBI's status quo on rates in its previous monetary policy in December 2019, SBI reduced interest rates on FDs for certain tenures by 15 bps.
With effect from January 10, 2020, SBI's interest rate on one-year FD is 6.10 per cent against 6.25 per cent in November 2019. For senior citizens, the current interest rate on one-year FD is 6.60 per cent against 6.75 percent in November 2019. In August 2019, these FDs were earning 6.8 percent for general individuals and 7.3 percent for senior citizens.
Usually, senior citizens are hit the hardest by falling FD interest rates. With FD rates earning less than other comparable fixed-income investments, financial planners advise that senior citizens consider small savings schemes like post office term deposits and Senior Citizens' Saving Schemes.
For the fourth quarter of FY20, the government has kept interest rates of small savings schemes unchanged. Currently, these small savings schemes are earning slightly higher returns compared to FDs. For instance, post office term deposits come with interest rates in the range of 6.9-7.7 percent (paid out on an annual basis).
