Rate cuts usually point to a larger change in the overall banking and financial outlook of a country. The Reserve Bank of India (RBI), after sticking to its guns to not alter repo rates, has finally done so, twice! As a consequence, consumers can expect real changes in borrowing and lending rates in the coming weeks and months. And, according to industry experts, the latest rate cut by RBI may not be the last one this year.
Response by different banks
Banks have been slow in reflecting the rate cuts as declared by the RBI. As of 3rd March 2015, only 3 out of 47 registered lenders in the country had declared cuts in their base rates, weeks after the first rate cut was announced by the apex bank. The banks have stuck to the line that the policy rate cuts have not resulted in a decrease in cost of funds for them, and so they have been hesitant to cut lending rates.
However, some of the well-established lenders have finally taken note of the rate cuts, and are poised towards reflecting the changes in their products. HDFC Bank Ltd. is expected to announce a rate cut in the coming days, according to its CEO Mr. Keki Mistry. The largest Indian banking corporation, State Bank of India, is in the process of making changes though an announcement in this regard is still to be made.
Effect on EMIs and tenure
EMIs are expected to fall more in the coming days. Retail borrowers can expect real gain in terms of EMI payments on various types of loans as the RBI announced another rate cut of 25 basis points. The recent rate cut signals a further loosening of interest rates for borrowers. However, the rate cuts are also going to affect fd rates adversely, by giving lower returns on deposits.
With respect to home loans, a fall in rates will translate to real savings on EMI. For instance, a Rs. 20 lakh home loan for 20 years at 10.20% interest p.a. will see a reduction of Rs.266 on monthly repayments, for a 20 basis point cut in rates.
However in some cases banks may reduce the overall loan tenure by figuring in the rate cuts, rather than reduce the EMIs. In such cases, customers will benefit from shorter repayment tenure while paying the same monthly amount.
Effect on fixed deposit rates
Though banks may reduce fixed deposit rates, it is still difficult for them to offer steep cuts on these products as compared with other financial products. Various post office savings accounts and small saving schemes are already offering competitive rates on savings. For instance, SBI offers 8.25% rate of interest on fixed deposits of tenures equal to or more than 5 years, while National Savings Certificate and India Post offer 8.50% interest rate on the same criteria.
Financial planners are putting their bets on investing in fixed deposits for now. According to Mr Surya Bhatia, a financial planner based in Delhi, it is the best time to lock your money in fixed deposits as rates are likely to fall again in the coming months. Even though the smaller savings instruments discussed above offer higher interest rates, they can’t match the flexibility offered by a traditional fixed deposit account. For instance, an FD account may be used for availing a loan against it, providing you with instant sizable liquidity.
Therefore, if you are planning on fixed deposits, it is high time to lock in your money before further changes hurt your profits.
Ileana Lyardson is a financial writer and guides investors to achieve their financial goals based on her hands-on experiences in the field. With keen interest in the banking domain especially wealth management, she has undergone several financial certifications to keep abreast with the diverse financial fields. She publishes various explanatory blogs that help people make informed financial decisions.