“Tough times don’t last, but tough institutions do.” This sums up the challenge India is facing with the Covid-19 crisis. The Reserve Bank of India (RBI) Monetary Policy Committee (MPC) met before its scheduled April meeting to mitigate the financial challenges faced by the common man and the economy in the wake of crisis. The central bank announced several key measures to reduce the damage caused by Covid-19 crisis on the economy.
Here are the key takeaways from the RBI MPC that will have an impact on your money.
Repo Rate Means Cheaper Lower
The Reserve Bank of India MPC voted unanimously to lower the key interest rate, repo rate, by 75 basis points (bps). The rate cut brought the repo rate to 4.40% from the 5.15% earlier. This was the big-bang announcement today and would bring in major relief for borrowers. The repo rate is now the lowest it has been in more than a decade. This would lead to a fall in loan rates during the next scheduled resets. The SBI, for example, has a home loan with an external benchmark rate (EBR) linked to the repo rate. The EBR is currently 7.80%. At the next reset, the EBR would fall to 7.05%. This would immensely benefit borrowers by reducing their interest burden. The reductions in rates of MCLR-linked loans remains to be seen. Banks are expected to gradually announce these cuts over the coming days.
Mandated by the RBI last year, many banks launched new loan products linked to the repo rate. For repo-linked loans, the interest rates reset at least once every three months. With the repo rate going south, all borrowers will benefit from low interest rates.
Moratorium On Term Loans
The RBI announced that all lending institutions are allowed to have a moratorium of 3 months with respect of term loans, including home, car and personal loans.
It’s statement said, “all commercial banks (including regional rural banks, small finance banks and local area banks), cooperative banks, all-India financial institutions, and NBFCs (including housing, finance companies and micro institutions) (“lending institutions) are being permitted to allow a moratorium of three months on payment of instalments in respect of all term loans outstanding as on March 1, 2020. Accordingly, the repayments schedule and all subsequent due dates, as also the tenor for such loans, may be shifted across the board by three months.”
This means that you can enjoy a three-month EMI holiday if your bank or lending institutions allows you to do so depending on your financial condition. The moratorium will provide big relief to borrowers struggling with income uncertainty in these extraordinary times facing an uncertain financial future. However, if you are in a position to continue to pay your EMIs, it would be wise to do so, because your EMIs aren’t being cancelled but merely delayed. Continued payments would lower your loan burden. Most importantly, get complete clarity with your lender about how they will implement the moratorium, and don’t assume anything based on hearsay.
Credit Card Dues
The moratorium has been announced on credit card dues too. However, you should keep on paying your credit card dues because even during the moratorium, interest will continue to pile up. Credit card debt is expensive and the interest can pile up quickly and become a burden. Therefore, if you can, keep paying your dues on time. If not, you can always use the moratorium to manage your liquidity issues.
While announcing the moratorium on term loans, the RBI said that the loan EMI holiday will have no impact on the credit history of a person. This is significant as a good credit history is built with timely repayments. Although the central bank has announced a moratorium, it would be wise to repay your dues and keep checking your credit score to flag any major issues.
Deposit, Small Savings Returns Will Fall; Debt Funds Will Gain
The repo rate cut would also lower the interest returns from savings, fixed and recurring deposits, and small saving schemes. You must follow the updates from your bank to know how far your interest returns will shrink. At some point, the government may also announce rate cuts in schemes such as PPF, though this remains to be seen. Long-term debt funds will gain from the repo rate cut. Bond prices rise with interest rate cuts, thus pushing up NAVs of bond funds.
Reverse Repo, SLR, CRR Cut Impact
The RBI also announced a big, 90 basis points reduction in the reverse repo rate, or the rate at which banks earn interest on the money parked with the RBI. With the reverse repo rate falling to 4% after today’s rate cut, the RBI makes it relatively unattractive for banks to passively deposit funds with RBI and instead use it for lending. To aid this, the RBI also reduced the cash reserve ratio (CRR) of all banks by 100 basis points to 3% and reduced the minimum daily CRR balance maintenance from 90% to 80%. The RBI has also deferred the transfer of the last tranche of Capital Conservation Buffer. Taken together, all these steps will increase the liquidity in the system in a big way and allow the lenders to provide loans at much lower rates.
You should also follow a set budget in this hour of crisis as government is doing whatever it can to make your life comfortable. The ball is in your court to stay safe and healthy. So follow what the RBI suggested in the end of MPC speech – ‘Stay Clean, Stay Safe, Go Digital.
The author is CEO, BankBazaar.com, India’s leading online marketplace for loans and credit cards.