Impact of RBI repo rate cut on borrowers, depositors -- who should do what?
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Impact of RBI repo rate cut on borrowers, depositors -- who should do what?

The repo rate cut is good news for home loan, car loan or other borrowers who would soon see their EMI burden ease off

  • New Delhi,  May 22, 2020  
  • |  
  • UPDATED   15:50 IST
Impact of RBI repo rate cut on borrowers, depositors -- who should do what?
In March, RBI had allowed a three-month EMI moratorium between March 1 and May 31

In a surprise move, RBI governor Shaktikanta Das reduced the repo rate by 40 basis points to 4 per cent - the lowest ever. The repo rate had already hit its lowest at 4.4 per cent in March when the RBI had reduced the rate by 75 basis points. Before this, it had hit the lowest point of 4.75 per cent in April 2009.

Further, the central bank extended the moratorium period on term and credit card loans by another three months until August 31. In March, RBI had allowed a three-month EMI moratorium between March 1 and May 31 to help borrowers deal with the coronavirus-linked shortage of funds.

Here is what you should know about the impact of these key announcements:

Avoid opting for EMI moratorium

The extension of the moratorium will indeed benefit those facing a short-term money crunch. But, you must not take it just because it is available. Opt for it only if you need it because interest rate will be charged on the loan outstanding during this period.

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"It is worth to re-emphasise this extension of loan EMIs doesn't mean a waiver on repayments as interest will continue to get accrued on the principal outstanding. Simply put, you'll be well-advised to take the moratorium option only if you're finding it extremely difficult to repay your loans during these six months," says Adhil Shetty, CEO, BankBazaar.

Say no to moratorium on credit card dues

Opting for moratorium on your credit card dues will not be a wise decision. Paying it off by resorting to your emergency funds or even by taking a personal loan will be a better choice than taking moratorium on it since interest rates on credit cards are often as high as 30-40 per cent.

Plan your re-payments if you opt for EMI moratorium

The extension of moratorium will indeed benefit those facing a short-term money crunch. However, you must make all calculations beforehand and have a plan to make repayments, especially of the interest accumulated during the moratorium period. Make sure to  repay it soon after the moratorium ends, otherwise the amount will get added to your loan outstanding and start accruing interest.  "Opting for the moratorium could extend your loan tenure by tens of EMIs, considerably adding to your loan burden, especially if you've just started repaying your loan. The point being, calculate the accumulated interest before you take the moratorium, and see whether you can pay it back, in addition to your EMIs, quickly," says Shetty.

Repo rate cut impact on borrowers

The repo rate cut is good news for home loan, car loan or other borrowers who would soon see their EMI burden ease off. Note that the transmission of rate cut to EMIs will be quicker for borrowers who have linked their loan with the repo rate. If your loan is still linked with the MCLR, you may have to wait longer.

"MCLR is an internal benchmark rate and here, the repo rate is not the sole factor in determining the lending rate. Other sources of funds are also taken into account and that is why, many times the fall in repo rate does not result in a fall in lending rate for end customers (in a similar proportion)," explains  Pranjal Kamra, CEO, Finology.

"On the other hand, RLLR is an external benchmark which is more transparent. The borrower does not depend upon the bank to decide the lending rate, it automatically gets adjusted with repo rate. As we know, the repo rate has been cut once again today. Looking at the economic downturn, it is expected to be cut further. Since the transmission happens quickly in case of repo linked lending rate, it will be directly beneficial for the borrowers."

Repo rate cut impact on depositors

Depositors who keep their money in savings account and fixed deposits will face tough time as interest rates will fall further. The one to three years fixed deposits at State Bank of India have already hit 5.5 per cent. It can see further reduction. So, if you are a conservative investor, you need to manage your FDs better to maximise returns on the same and should also explore other safer investment options. "The money you need in the near-term (1-2 years) should be parked in FDs. The money you don't immediately need should be put in a mix of investments that provide higher returns. These could be VPF, PPF, Sukanya Samriddhi or the GOI 7.75% Bond. The retired can seek the Senior Citizens Savings Scheme. There are also some corporate FDs and small bank FDs that still give you more than 8 per cent. You can pick them as per your risk appetite and returns needs. Go with company FDs with AAA ratings. Even with FDs, always diversify and never put all your eggs in one basket," suggests Shetty of BankBazaar. 

Also Read: RBI rate cut: For home loan of Rs 50 lakh, EMI to reduce by this much

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