The Reserve Bank of India (RBI) left many surprised as its Monetary Policy Committee (MPC) decided to maintain status quo on keys rates, pausing the repo rate at 5.15%. The market was expecting a repo rate cut of 25 basis points, however, the RBI wants to see how inflation will be a factor going forward and also want to consider the announcements that will be made during the Union Budget on February 1 before it decides to take a call on another rate cut during its next meet on February 6. So far the central bank has reduced the key lending rate by 135 basis this calendar year through five consecutive cuts.
Here are the key takeaways for the common man:
In its monetary policy review, the RBI highlighted that the monetary transmission has been satisfactory and going forward it is bound to improve on the back of decline of base rate loans, interest rates; and MCLR-based floating rate loans due for annual renewal. It said, “The 1-year median marginal cost of funds-based lending rate (MCLR) has declined by 49 basis points.” The central bank has been taking steps to reduce home loan rates for the borrowers and make it beneficial for them. Banks have rolled out new, repo-linked loan products since the RBI mandated it to link loan rates to external benchmark rates like the repo rate, the three-month or six-month Treasury Bill yield published by the Financial Benchmarks India Pvt. Ltd (FBIL), or any other benchmark market interest rate published by FBIL. The interest rates are reset at least once in three months under the external benchmark regime. The external benchmark linked rates will help particularly the new home loan borrowers. If you have taken an MCLR based home loan, you will also benefit as the EMI may come down as soon as the reset date would approach. You can also switch to another bank offering a lower interest rate.
New Pre-paid Payment Instrument
In a move to boost digital transaction, the RBI also announced the launch of a new pre-paid payment instrument. The new payment system can be used for payment of goods and services up to a limit of Rs. 10,000. While acknowledging the importance of prepaid payment instruments, the central bank said, “Prepaid Payment Instruments (PPIs) have been playing an important role in promoting digital payments. To further facilitate its usage, it is proposed to introduce a new type of PPI which can be used only for purchase of goods and services up to a limit of ₹10,000.” It further added that the loading/reloading of such PPI will be only from a bank account and used for making only digital payments such as bill payments, merchant payments, etc. Such PPIs can be issued on the basis of essential minimum details sourced from the customer. Instructions in this regard will be issued by December 31, 2019. In the last monetary policy meet, the RBI had announced the appointment of Ombudsman for Digital Transactions to redress the customer complaints against the prepaid instrument issuer.
What Happens To Fixed Deposits
While the RBI said that deposit rates are seen trending downwards, today’s rate pause will not lead to any dramatic changes to fixed deposit rates. Banks have been reducing the fixed deposit rates. If you are a conservative investor and rely on safe investment instruments, opening a fixed deposit would be a good idea to protect yourself from inflation and volatility. The RBI has however hinted at a rate cut in the next policy review. In case you want to move away from FD, small saving schemes can be a good option as they still promise steady and assured returns.
The RBI is slated to meet in February 2020 after the budget for the current financial year. It said it is maintaining an accommodative stance and may take a rate cut call in Feb.
The writer is CEO, BankBazaar.com, India’s leading online marketplace for loans and credit cards.