The Reserve Bank of India’s monetary policy announcement Wednesday to keep the repo and reverse repo rates unchanged at 4% and 3.35%, respectively, was largely on the expected lines given the major resurgence of Covid-19 cases leading to micro restrictions being imposed in some pockets of the country amid an accelerated vaccination drive still in its initial stages. “The MPC also decided to continue with the accommodative stance as long as necessary to sustain growth on a durable basis and continue to mitigate the impact of COVID-19 on the economy, while ensuring that inflation remains within the target going forward,” RBI Governor Shaktikanta Das announced.
Let’s dig a bit deeper to understand how the announcements made at the first MPC meeting of FY2021 amid the second wave of the pandemic could impact your money.
Home loans to remain cheap for now
The repo rate has now remained unchanged at 4% for almost a year now (it was reduced from 4.40% to 4% on May 22, 2020). This has already led to banks reducing their loan interest rates to boost economic revival. In fact, bank home loan interest rates, which have been linked to an external benchmark like the repo rate following an RBI directive in October 2019, have already been at multiple-decade lows. There are currently at least 15 banks that are offering floating-rate home loans starting at under 7% p.a. – something that has even pushed a number of housing finance companies to reduce their home loan interest rates (which are benchmarked to their prime lending rates) to all-time lows to remain competitive. The latest MPR announcements will continue this trend at least for a few more months. Meaning, if you’ve been planning to take a home loan and have the necessary margin funds and sufficient repayment capacity, this is indeed a great time for you to realise your dream of buying a house. However, in doing so, ensure your credit score remains above 750-800 so that the risk margin of repo-linked loans doesn’t get activated and you could enjoy the best available interest rates to keep EMI obligations under control.
Fixed Deposits rates to remain unattractive in most cases
The latest MPR announcement would also mean that fixed deposit interest rates, which have plummeted over the last year or so, are unlikely to see any major upswings. The lowering FD rates have been a cause of concern for countless risk-averse investors like senior citizens who heavily rely on their returns to not just meet their financial goals but also their day-to-day expenses. Most of the banks are currently offering interest rates in the range of 4.25%-5.75% p.a. for normal FDs amounting to less than Rs. 1 crore (senior citizen depositors usually get preferential rates by up to 50 basis points above the normal rates) with the exception of a few private and small finance banks offering higher interest rates up to 7.51% p.a. for tenures up to 5 years. That being said, investors would be well-advised to not look away completely from FDs despite the low rates during these uncertain times. They could look to smartly diversify their investments to other products and asset classes like small savings schemes, NPS, VPF, equity mutual funds, direct equities, etc. to earn higher overall returns if doing so is in line with their returns expectations, risk tolerance and liquidity requirements.
A couple of steps to boost digital transactions
The MPR also announced that money transfer mechanisms NEFT (National Electronic Funds Transfer) and RTGS (Real-Time Gross Settlement) will now be extended from banks to non-bank payment system operators to further enhance the digital transactions eco-space. “Over the last few years, the role of non-bank entities in payment space (e.g. Prepaid Payment Instrument (PPI) issuers, Card Networks, White Label ATM (WLA) operators, Trade Receivables Discounting System (TReDS) platforms), has grown in importance and volume, as they have innovated by leveraging technology and offering customised solutions to users. To reinforce this trend and encourage participation of non-banks across payment systems, it is proposed to enable, in a phased manner, payment system operators, regulated by the Reserve Bank, to take direct membership in CPSs (i.e. RTGS and NEFT). This facility is expected to minimise settlement risk in the financial system and enhance the reach of digital financial services to all user segments,” the RBI said in a statement.
Additionally, keeping in mind the growing popularity of payment banks in the country, the central bank also announced to hike the maximum end of day balance in them from Rs.1 lakh to Rs. 2 lakh. “Based on a review of performance of payments banks and with a view to encourage their efforts for financial inclusion and to expand their ability to cater to the needs of their customers, including MSMEs, small traders and merchants, it has been decided to enhance the limit of maximum balance at end of the day from ₹1 lakh to ₹2 lakh per individual customer,” the statement added. This step is in line with the demands of the payment banks and would encourage more users to opt for contactless and cashless transactions.
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