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RBI Keeps Key Rates Unchanged. Takeaways For The Common Man

Adhil Shetty


The common man would welcome the RBI’s decision to maintain the repo rate at 6.50%. The bigger picture is that with the RBI pausing the rates for now, your loan EMIs and deposit rates would remain stable. If inflation remains under a benign 4%, the rates may fall in the near future. However, there remains uncertainty over future oil prices even as global trade tensions remain and hence the RBI would require more time to decide if rates should be cut. In 2018, we had seen two interest rate hikes due to increasing inflation. The common man would welcome the benign inflation data for now with the hope that rates may fall soon.  

Why Wasn’t The Rate Changed? 

The RBI maintaining the rate during the December 2018 Monetary Policy Review did not come as a surprise. Crude oil prices have fallen steeply in the last month. The Indian Rupee has strengthened by nearly five rupees since it peaked near the 75 mark in October. Inflation has fallen in this period, and the projected inflation for the next 12 months is expected to be under 4%. The overall scenario is positive for the common man.  

Consider Pre-Payment On Loans 

What does the latest MPR announcement mean for you as a borrower? Customers who have taken loans can wait and watch to see how banks and NBFCs revise their rates. Since the interest rates are stable, existing borrowers can consider pre-paying their loans. This is a better option than making pre-payments when rates are rising. This is because a lower rate allows you to make greater progress on your loan repayment, as a higher portion of your EMI goes towards principal instead of interest. Let’s say you borrowed Rs. 50 lakh for 20 years at an interest rate of 8.80%. Your EMI is Rs. 44,345. Your total interest cost is Rs. 50.26 lakh. Let’s assume you pre-paid Rs. 100,000 with every 13th EMI. Pre-paying reduced your tenure from 240 months to just 168, while reducing your interest costs to Rs. 37.25 lakh, thus saving you Rs. 13.01 lakh over the long-term. However, do check with your lender about the pre-payment charges before you take this call.

Get Higher Returns On FDs 

Recently, a leading private sector bank raised its 2-3 year deposit rates to 7.50%. Currently, smaller banks and corporate deposits are offering interest rates upwards of 8%. Small investors can use this opportunity to lock-in their FDs for the long-term so that they continue to get high returns even if rates fall in the future.    

What To Do With Equity Investments 

The stock markets have seen turbulence recently. Equity investments are best suited to long-term goals such as building a retirement corpus. Therefore, if there is still time left for you to achieve your goal, remain invested, or continue investing as per your goal. If you’ve achieved your goal, consider cashing to avoid eroding your capital. A falling market allows you buy mutual fund units or shares at lower prices, which reduces your average purchase costs. When the cycle reverse and markets rise again, you can have much higher returns. 

What To Do With Debt Investments 

With tightening liquidity and strengthening yields, it is only natural to expect some sort of volatility in the debt market, particularly with long term debt mutual funds. If you are an existing investor, do not panic and continue sticking to high quality funds. Consider shorter duration debt funds as they have the inherent advantage to handle interest rate shocks better, and you can also take a leaf out of the equity handbook and consider SIPs to ride any volatility there may be in the foreseeable. 

The writer is CEO, BankBazaar.

BankBazaar.com is a leading online marketplace in India that helps consumers compare and apply for credit card, personal loan, home loan, car loan, and insurance.