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RBI cuts interest rate but reduction in your home loan EMI will be slow

Higher than normal rate cut is a signal for banks to cut lending rates aggressively before festive season.

, ET Bureau|
Updated: Aug 12, 2019, 04.21 PM IST
At the same time, the rate cut by RBI is likely to result in downward revision of deposit rates as well as in small savings schemes.
The country’s central bank has cut interest rates for the fourth time in a row. The repo rate cut has been cut by 35 basis points and now stands at 5.4%—the lowest since April 2010. With this, the RBI has reduced interest rates by 110 bps since the start of the year. The higher than normal rate cut is ostensibly a signal for banks to cut lending rates aggressively before the festive season kicks in.

This should bring cheer to borrowers but it is pertinent to note that banks have lagged in transmitting the cut in rates to borrowers. During the current easing phase, banks reduced their weighted average lending rates by 29 bps, compared to a corresponding 75 bps cut by the RBI. Most recently, SBI cut its marginal cost of lending rate (MCLR) by 5 bps across all tenors while HDFC Bank slashed it by 10 bps. Mortgage financier HDFC also reduced its lending rates by 10 bps for both new and existing borrowers.

SBI cut MCLR by another 15 bps after the rate cut was announced. Further cuts would depend on the banks’ willingness to pass on the benefit to customers. “In the past, despite rate cuts like these, home loan interest rates remained sticky as deposit rates for banks remained high,” points out Tanuj Shori, Founder and CEO, Square Yards and Square Capital.

As such, do not expect home loan EMIs to come down sharply in a hurry. For existing borrowers, this rate cut will bring down your EMI outgo only when your bank lowers its MCLR. “The success of this accommodative policy would depend entirely on the next level of its application, that is, the transmission of the lower rates to the ultimate borrowers,” says K. Joseph Thomas, Head Research, Emkay Wealth Management. He reckons, however, that effective cascading of the benefits of lower base rate may happen over the next few months.

At the same time, the rate cut by RBI is likely to result in downward revision of deposit rates as well as in small savings schemes. Already, banks have cut interest rates on fixed deposits in recent months. SBI has cut rates by 50-75 bps for shorter tenure deposits and up to 20 bps for longer tenures. “Deposit rates should continue to drift lower,” asserts R.K. Gurumurthy, Head – Treasury, Lakshmi Vilas Bank, who expects transmission to improve significantly in the coming days.

The government had also reduced interest rates on small savings schemes by 10 bps for the July-September quarter. These rates are linked to the prevailing yield on 10 year government bond and revised every quarter. With the 10 year yield softening sharply in recent weeks, investors may see further cuts in interest rates on their small savings instruments for the coming October-December quarter.

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