India markets closed

RBI Repo Rate Cut: What Will It Mean For Loan And FD Rates?

Olga Robert

On Friday, at the press briefing post the monetary policy committee's off-cycle meeting, Reserve Bank of India (RBI) governor Shaktikanta Das announced a 40 basis points (0.40%) cut in repo rate to 4 percent, with immediate effect. Cumulatively, from previous announcements, the repo rate has been cut by 1.15 percent by the central bank since the lockdown.

It is a mixed sentiment for bank customers. Repo rate is the rate at which RBI lends money to banks.

Borrowers

The rate cut is good news for borrowers as it will likely reduce equated monthly instalments (EMIs) and new loans could become cheaper.

If your loan is linked to an external benchmark i.e., the repo rate, treasury-bills etc. as mandated by the RBI, they can expect to see their EMIs coming down in the next three months.

As per RBI's circular dated 4 September 2019, the rates have to be reviewed and reset by banks at least once every three months.

New loans linked to RBI's repo rate as their benchmark will get cheaper.

For loans linked to MCLR (marginal cost-based lending rate), borrowers will see benefits only after their banks reduce loan rates. The reduction in MCLR will be translated in your EMIs when the reset period kicks in.

Generally, home loans or other popular loans linked to MCLR are reset once every 6 months or a year.

Depositors

Interest income from fixed deposits (FDs) and savings account is set to fall further with the revision in repo rate. In the last few months, banks have been announcing a reduction in interest rates more than once in a month to reflect the fall in their interest income from lending.

A similar announcement could be expected soon. It is expected to particularly hurt senior citizens who depend on interest income. SBI, HDFC Bank and ICICI Bank have recently announced their special senior citizen FD schemes that fetch slightly higher interest.

Also Read:

Cut In Repo Rate Should Enable Banks To Cut Lending Rates

RBI Cuts Repo Rate By 40 Bps To 4%

HDFC Bank Launches Special FD Scheme For Senior Citizens Amid COVID-19