RBI has finally hit the pause button on repo rate cuts. After five rate cuts in a row, the Reserve Bank of India has kept the repo rate unchanged at 5.15%. It was widely believed that RBI would cut rates by 25 bps in December, but it didn’t oblige.
This is good news for fixed deposit holders who have seen FD rates falling in recent times. Now, banks would hit the pause button on cutting FD rates.
The repo rate is 5.15% and reverse repo stands at 4.9%. For those who don’t know, 100 basis points = 1%. Just take a look at the RBI repo rate cut since February 2019. The repo rate has been cut by a massive 135 bps. So, what happens to loans and FDs?
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See Also: Fixed Deposits Interest Rates 2019
Banks have been cutting FD rates in recent times. Fixed Deposit holders are a relieved lot as RBI has not cut repo rates.
Take a look at SBI's one-year FD interest rates in August 2019. SBI offered 6.8% to ordinary citizens and 7.3% to senior citizens. Now, take a look at SBI one-year FD interest rates in November 2019. SBI offered 6.25% to ordinary citizens and 6.75% to senior citizens. This is a 50 bps rate cut in just 3 months.
Well, it’s the senior citizens of course. With banks cutting FD rates, where will senior citizens with no income get money for daily expenses? Financial Advisors have asked senior citizens to shift FD investments to post office schemes or senior citizen saving schemes which offer much higher returns. Remember: Small saving scheme interest rates are due for a review in December 2019.
If your loans are linked to an external benchmark regime, you continue to pay the same EMIs as before as there are no changes in repo rates.
Banks have cut MCLR rates as RBI has been reducing repo rates. Now, SBI has reduced MCLR by 55 bps between January to November 2019. However, you don’t enjoy lower rates on MCLR-linked home loans until the loan reset date arrives. Loan reset dates are usually 6 months to a year. Loan interest rates are revised based on prevailing market conditions on reset dates.
Should you switch from MCLR-linked loan to externally benchmarked loan? Well, you can but you must bear administrative costs. Before making the switch, check the spread and risk premium charged by your bank. Compare rates across banks to get cheap home loans. Financial Advisers ask you to make the switch only if the interest rate difference between loans is 0.5% or more.
See Also: Benefits of Fixed Deposit in India
If you are a new home loan borrower, the home loan will be linked to an external benchmark like a repo rate. RBI has not cut repo rates in the December policy review meet, but it could do so in the future. Shaktikanta Das the RBI Governor has said there may be more rate cuts in the offing.
Look at Pradhan Mantri Awas Yojana (PMAY) and see if you are eligible to take a home loan under the scheme. You enjoy credit-linked subsidy based on your annual income. This is under the flagship program ‘Housing For All’.
If you belong to the Middle-income group – I (MIG - I); you enjoy interest subsidy of 4%. You get this on having a household income between Rs 6 Lakhs to Rs 12 Lakhs. If you are in the Middle-income group – II with household income between Rs 12 Lakhs to Rs 18 Lakhs, you get an interest subsidy of 3%. These subsidies are available till March 31st, 2020.
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