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So many interest rates

So many interest rates

Keep as watchful an eye on interest rates as you do on prices. There are a dozen or more rates, so which should you look at? We pick out six that we believe are relevant to almost everyone.

For an increasing number of Indians, the EMI is replacing MRP as an indicator of affordability. And as this happens, the interest rate — and not inflation rate — becomes the key indicator of economic well-being, affecting both your income (returns) and expenses (price).

So, keep as watchful an eye on interest rates as you do on prices. There are a dozen or more rates, so which should you look at? We pick out six that we believe are relevant to almost everyone.

PRIME LENDING RATES

What is it

Perhaps the most significant of all interest rates, it determines the cost of borrowing for companies and individuals. It's the rate that banks charge from their best (prime) borrowers.

Why it matters

The PLR is the benchmark for rates of education, personal and car loans. It’s the yardstick for the rates at which companies borrow. If the cost of corporate borrowing rises, it could affect everything from profits to share prices to the price of products and services.

The current rate

Declared range 12.75-13.50% | Actual range 3-26%*
* The range shows the scope of negotiations on interest rate

BANK DEPOSIT RATES

What is it

This is the interest rate the majority of us is most familiar with. The bank deposit rate is the rate the bank pays on the money we deposit with it. The most common types of bank deposits are savings, fixed term or recurring.

Why it matters

This interest rate directly affects the income you earn from savings. For banks, this rate determines the cost of funds they lend. The lower bank pays on your deposits, the lower it will charge on the loan it gives you.

The current rate

Savings account 3.5% | fixed deposits 7.5-9.6%

T-BILLS RATES

What is it

This is possibly the most obscure of all rates. Treasury bills or T-bills are the means through which government borrows money from financial institutions. Since there is no risk of default, the interest rates are low. T-bills are issued through a competitive bidding process at a discount from par. It means that rather than paying fixed interest, the appreciation of the bond provides the return to the holder.

Why it matters

This rate affects your return on investments. Mutual funds, mainly debt, and insurance premiums, including Ulips, are invested in T-bills.

The current rate

91 days: 7.52% | 182 days: 7.59% | 364 days: 7.74%

REPO, REVERSE REPO RATES

What is it

These might be the vaguest sounding interest rates, but they have been getting better known in the past few years. That’s because RBI started regulating cost of credit through changes in these rates. Repo is short for repurchase. Repo rate is the rate at which RBI lends short-term money to banks and reverse repo is the rate at which banks lend money to RBI.

Why it matters

Through changes in repo and reverse repo rates RBI influences levels of several other interest rates, including the ones on home loans and personal loans.

The current rate

Repo: 7.75% | Reverse repo: 6%

HOME LOAN RATES

What is it

You know this better than other rates — it’s the rate you pay when you borrow to buy/build a house. But chances are you probably don’t know a lot about this rate. For instance, banks offer a fixed and a floating rate and they have different ways of calculating outstanding as you pay your EMIs.

Why it matters

Real estate has created more crorepatis in India than any other asset. That’s after home loans became affordable to the middle class. For most Indians, long-term financial security is influenced by this rate.

The current rate

Fixed 11-13.5% | Floating: 10-11% (indicative range)

BANK RATES

What is it

The bank rate is the rate of interest which the RBI charges on the long-term loans and advances that it extends to commercial banks and other financial intermediaries. It’s important to investors because the central bank uses the changes in this rate to control the availability and cost of money.

Why it matters

Potentially the most significant interest rate, the changes in this rate can affect the cost and timing of your borrowing more than change in any other rate and for a much longer term. That’s perhaps the reason why RBI hasn’t change this rate in the past two years.

The current rate

6%

THE RATE INFLUENCERS

Spread

The difference between deposit and lending rate is called the spread or the cost of intermediation. This cost is borne by you. In India the average spread is 5.1, implying that the rate at which you borrow is 5.1% higher than the interest rate banks pay you on your deposit. Spread per cent of Indian banks is very high by global standards. In the US it is 2.9% and in China 3.4%.

Secured vs unsecured

In addition to the cost and availability of funds, interest rates also depend on risk—how sure the lender is of getting the money back. That’s why rates are lower for secured loans, or loans that are backed by collateral (e.g. car, house). Unsecured loans (e.g. credit card rollovers or personal loans) are not backed by any security and are therefore more expensive.

Inflation & duration

The longer the duration (tenure) of a loan, the greater the uncertainty over whether the borrower will be able to repay it. So, lenders have to be compensated for the greater risk with higher interest rates. Long-duration loans also carry greater risk of value erosion because of inflation. Higher inflation reduces the purchasing power of the loan repaid.

Source: All rates from www.rbi.org.in as on November 30