How Does RBI Rate Cut Impact EMI of Loan ?

How Does RBI Rate Cut Impact EMI of Loan ? – Reserve Bank of India has cut the repo rate in their bi monthly review for year 2016-17 by 0.50% to 6.50% present. After the reduction of Repo Rate many of the leading commercial banks in India like SBI, Syndicate Bank, ICICI Bank, HDFC bank, PNB, Bank of India, Bank of Baroda, canara Bank etc have reduced their Base rate with immediate effect.

Know : [highlight]Basic Details of Marginal Cost of Funds based Lending Rate (MCLR) By RBI[/highlight]

Repo is the rate at which commercial banks borrow money from the RBI. One basis point is one hundredth of a percentage point or bps.

Read : [highlight]RBI Monetary Policy Review[/highlight]

The repo rate is now stands at 6.5%.

Implication of Rate Cut

What are the implication of much talkative Rate Cut ? The reduction of interest rate implies commercial banks to borrow money at a cheaper rate and vice versa.

Banks while having shortage of funds can borrow from the RBI if the Repo Rate cut implied. In case the Reverse repo rate was reduced, it means the rate at which RBI borrows from banks.

Read :[highlight] Why To Choose Floating Rate of Interest ?[/highlight]

It means in regime of low interest rate lending by banks becomes cheaper as the repo rate reduced. This helps in falling EMI (Equated monthly installment).The falling EMI psychologically widen the spending habit in consumers mind hence pacify growth in the system.

Beneficiary Sector of Repo Rate Cut

Check out the beneficiary sector for Repo rate cut. Who are the most benefited on EMI or loan ?

Effect on Home Loan Customers : The most benefited sector is Housing loan or real state if Rate cut made in Repo. Most of the housing loan from any of the commercial bank are linked to their base rate for loan up to certain limit mainly up to 50 lacs.

It is obvious that fall in Repo rate will automatically force bank to reduce their base rate or if housing loan is linked to newly introduced MCLR the impact will be almost immediate. The EMI on housing loan get reduced with some extra money with borrowers to spend. This drives the growth in economy.

Cheaper Car loan : Generally Car loan up to 10 lacs are linked with Base Rate of the bank. Falling Repo rate will drive car loan EMI to reduce with considerable amount.

Real State Sector – The most favorable sector to get the demand due to falling interest is Real estate sector. The demand for housing get automatically increased with lower interest. 

Inflation: Inflation is the weaker point for lower interest regime. With reduce in EMI the consumer save few of their penny to spend on other activities which naturally helps in boosting demand hence inflation. 

Jobs Demand : If companies get money ate cheaper rate, they try to accelerate the business hence demand for jobs will automatically increase.This, coupled with government reforms will increase industrial output, and hence Gross Domestic Product.

Equity Stock Markets: Hopefully most beaten banking stocks along with real state and auto stock will see the boost on assumption of higher demand due to falling interest.Further, lower interest rates means that money will move from lower yielding debt instruments to the risky, but high return yielding equity market.

Read : [highlight]What are Tax Saving ELSS Schemes ?[/highlight]

With lower interest rate on Fixed deposit , it is advisable to invest in mutual funds or government bonds or infrastructure bonds irrespective of Fixed deposit which yield Income Tax on return also.

Read :[highlight] FD Calculator – Fixed Deposit Interest Calculator[/highlight]

Who are the most impacted ?

It is Pensioners who depend on bank deposits or fixed deposit  are the worst affected in a low interest rate. Cheaper loan will reduce the interest rate on fixed deposit automatically that mean one lose out on a higher return on fixed deposits as banks reduce rates proportionately to protect their margins.