The Reserve Bank of India today lowered the repo rate by 25 basis points in its bi-monthly review cycle. The central bank meets every two months to review its key policy rates. The repo rate is the rate at which the RBI lends to commercial banks. This was the third bi-monthly review in which the repo rate was lowered, bringing it down to 5.75%, the lowest it has been since September 2010. Low interest rates are a cause for cheer for the common man as well as the economy. The economy registered its lowest growth rate since 2015. With inflation remaining low and crude prices remaining subdued, the RBI MPR committee unanimously voted for a rate cut and changed its policy stance from “neutral” to “accommodative”.
Here’s what the latest rate cut means for your money.
Lower Interest Rates On Loans
The RBI expects banks to pass on the policy rate cuts to consumers. It has been prodding banks to do a better job of transmission. The repo rate had come down from 6.50 to 6.00 in the last two cycles. But banks have transmitted only a small part of these rate cuts to consumers. While consumers will expect full transmission, they have received only 20-40% of the rate cut in their loans. If you take a loan of Rs. 50 lakh for 20 years at the interest rate of 8.70%, your EMI is Rs. 44,026. The long-term interest on this loan is Rs. 55.66 lakh. If the rate is reduced by just 10 basis points to 8.60%, the EMI falls by Rs. 318 to Rs. 43,708 and the interest falls by Rs. 0.77 lakh to Rs. 54.89 lakh. This isn’t much and the RBI expects the banks to do much more by the way of rate cut transmission. Either way, if you have a bank loan with a floating interest rate linked to the MCLR, you can expect some sort of rate cut at your next interest rate reset date. If your loan rate hasn’t fallen as per expectations, you must examine your options. You can check with your own bank about the possibility of moving you to a lower interest rate. If this doesn’t work out, you should examine the loan market and see if another lender would be able to offer you a lower interest rate.
Lower Returns From Deposits
When the repo rate falls, the interest rates on deposits all fall in tandem. Therefore, the interest you earn on bank savings, postal savings, small savings schemes, fixed deposits, recurring deposits etc. will be expected to reduce proportionately. This isn’t necessarily bad news. While the interest you earn is lower, you’re also in a low-inflation period. To help understand this, let’s look at this example. If you earned 9% on an FD while the inflation rate was 10%, your earnings are negative at -1%. But if you earned 7.5% while the inflation rate was 4.5%, you have positive gains of 3%. This is also a good time to invest in small savings and bank deposits where there is extremely low risk.
Impact on Debt Mutual Funds
Bonds and interest rates have an inverse relationship. When one goes down, the other goes up. So when interest rates fall, bond values rise. This positively impacts bonds. Debt mutual funds that contain long duration bonds receive a bump up. However, the debt fund market is at the same time going through volatility with various funds reporting a sharp drop in NAVs following defaults last week. Therefore, as an investor in bond funds, you must take stock of the quality of investments in your fund portfolio. If your fund contains highly risky debt, you must act to reduce your risks accordingly. If the debt fund volatility does not suit your risk profile, you must consider switching out to safer options such as small savings or bank deposits. You should also consider debt funds of lower maturity periods (liquid funds or similar funds) in order to reduce your interest rate risks.
Digital Boost: NEFT/RTGS Charges Waived Off
In another announcement, the RBI said it will waive off NEFT and RTGS charges. This was expected for some time now. There has been a strong push in favour of digital transactions, and the costs and charges associated with digital payments have been seeing a steady downswing in the last few years. Several banks had already waived off NEFT charges if transacted through internet banking. This waiver by RBI takes away the costs associated with fund transfer via NEFT and RTGS at par with other alternatives such as UPI. It is expected that even more customers would prefer to transfer funds via NEFT or RTGS, as the method is faster compared with offline alternatives such as cheque payments or demand drafts. This is especially significant in case of RTGS as it allows you to instantaneously transfer large amounts, typically greater than Rs.2 lakh, unlike UPI which has a transaction limit of Rs.1 lakh per day. Currently, RTGS would cost you anything from Rs.5 to Rs.50 depending on whether you were doing it via net banking or the branch. With the RBI waiving the fees, an RTGS transaction becomes as convenient and fast as UPI even when you transfer large amounts.
Finally, the RBI has also decided to review the fees banks charge for ATM usage. For this, the central bank will set up a committee led by the CEO of the Indian Banks’ Association.
The writer is CEO, BankBazaar.com