What is the effect of repo rate on debt and FD?

The Reserve Bank of India keeps changing the repo rate over time keeping in view the inflation and the state of the economy. The RBI has kept the repo rate unchanged at 5.15% after cutting the repo rate five times in a row. Earlier it was believed that RBI will cut the repo rate, but it did not do so. Currently the repo rate is 5.15% and reverse repo rate is 4.9%. Many of you may not find the meaning of basic point. 100 is basic point = 1%. If we take a look at the reduction in the repo rate by RBI from February 2019, we will find that the repo rate has been drastically reduced by 135 bps. Any change in the repo rate has a direct impact on the loan etc., so through this article we are going to tell you what will be the effect on FD and loan.

What is the effect on FD rates?

Banks have been cutting FD rates in recent times, but fixed deposit account holders would have been very relieved if RBI did not cut repo rate. This can be understood through an example. If we take a look at SBI’s FD rates of August 2019, we will see that at that time the bank was offering 6.8% for ordinary citizens and 7.3% for senior citizens, but in November 2019, SBI offered 6.25% to ordinary citizens and 6.75% was offered to senior citizens. Thus we see that SBI has cut the rate of 50 bps in just 3 months.

If banks cut FD rates, So who has the most impact?

If banks cut FD rates, it has the most impact on senior citizens. If banks continue to cut FD rates, then senior citizens, who have no monthly and regular income, will get money for their daily expenses. Because most senior citizens depend on FD income for their daily expenses after retirement. In this situation financial advisors suggest senior citizens to transfer their investment from FDs to post office schemes or senior citizen savings schemes, as these schemes provide higher returns from FDs.

What happens to loan rates?

We can understand the effect on the loan rates due to the reduction in the repo rate as follows –

Loans linked to external benchmark rates

If your loans are linked to any external benchmark rates, then these loans have no effect and you can continue paying EMIs as before.

MCLR linked loans

When the RBI lowers the repo rate, banks also cut MCLR rates. SBI has cut MCLR by 55 bps between January to November 2019 after RBI reduced the repo rate. However, even after the repo rate and the MCLR are low, the home loan rates associated with the MCLR are not reduced until the loan reset date is reached. The loan reset date is usually 6 months to one year. Loan interest rates are revised based on the prevailing market position on the reset date. In such a situation should you switch from MCLR-linked loan to external benchmark loan? Yes, you can, but in doing so you will have to bear administrative costs. Check the spread and risk premium charged by your bank before making the switch. Compare the interest rates of different banks to get a cheap home loan. According to financial advisors, switching is fine only if the interest rate of the two banks is at least 0.5% or more.

What will happen to borrowers thinking of taking a home loan?

If you are a new home loan lender, the home loan will be linked to an external benchmark like repo rate. RBI has not cut the repo rate in the policy review meeting held in December, but it can do so in future. RBI Governor Shaktikanta Das has said that rates can be cut in future. Check the Pradhan Mantri Awas Yojana (PMAY) and see if you are eligible to take a home loan under this scheme. If you are eligible, then take a loan under this scheme. You will be given the benefit of credit-linked subsidy based on your annual income. The scheme is operated under the flagship program “Housing for All (Gh for all)” of the Central Government. If you fall under the middle income group – I (MIG – 1), then you can avail interest subsidy of 4%.