The Reserve Bank of India was widely expected to reduce the repo rate by 25 basis points to 5.15 per cent to stimulate the economy, and it did exactly that.
To add to the festive mood, the Monetary Policy Committee (MPC) of the RBI voted unanimously to lower the key interest rate as consumer inflation remained within the central bank’s medium-term goal for 13 months in a row.
Today’s rate cut is the fifth so far in 2019, and the RBI has lowered the repo rate, the rate at which it lends to commercial banks, by 110 basis points in the last four bi-monthly reviews.
Here Are Key Takeaways For The Common Man
As mandated by the central bank, banks have begun to roll out loan products linked to external benchmark lending rates. They have to move away from the marginal cost of funds-based lending rate (MCLR). The banks has been given the choice to link the loan rates to 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 rate under an external benchmark will be reset at least once in three months. Several prominent banks have decided to go with the RBI’s repo rate linked floating rate loans. The banks can set and charge a spread over and above the repo rate. A new home loan borrower should wait to see how the repo rate would lead to changes in interest rates of rupee loans. It is widely expected that the external benchmark will make the retail loans cheaper for consumers.
Since the new benchmark applies to new loans only, loans of existing borrowers will continue the same way till their tenure ends. They can contemplate transferring their MCLR-linked or base-rate linked to a repo-linked loan. Loans taken from NBFCs and housing finance companies (HFCs) will see no change as these will not be linked to an external benchmark. Do consider the volatility factor associated with the external benchmark lending rate loans before taking a call.
What Lowering Of Interest Rates Mean For Debt Funds
It has been a tough phase for debt mutual fund investors owing to volatility in the markets, which has brought down their net asset value (NAVs). Bonds and interest rates have an inverse relation so a fall in interest rate means a rise in bond prices, and hence an appreciation in bond funds—and vice versa. The slowdown in the global economy and various geo-political changes indicate towards further volatility in the markets. You can review your debt funds portfolio and may shift your investments to safer options like public provident fund, fixed deposits and small saving schemes, which are still assuring steady returns. You may consider shorter duration debt funds to reduce the risks arising out of interest rates.
What happens To Your Fixed Deposits
Since the last repo rate cut in August of 35 basis points by the RBI, many banks have lowered their fixed deposit interest rates. With low inflation and volatility in the stock market, it would be wise to maintain liquidity using fixed deposits which also provide a moderate rate of return. You can also consider investing in small saving schemes, interest rates for which was not changed by the government for the October-December quarter. They still promise steady and assured returns.
Fund Transfer Through NEFT 24×7 Now
The RBI is also outlining ways to ensure that come December, NEFT will be made available on 24×7 basis. To enable better fund management by banks for NEFT payments, the RBI has decided to provide round the clock collateralised liquidity support, which is currently available till 7.45 pm on NEFT working days. This will help banks process NEFTs faster and round the clock, making fund transfers easier.
IO For PPIs
Over the years, the share of the share of electronic transactions in retail payments have increased significantly. With the increase in popularity and usage, there has been an increase in the number of complaints related to digital payments and PPIs issued by banks and non-banks. Taking these factors into account, the RBI announced an ombudsman scheme for Digital Transactions earlier this year. Under this scheme, the RBI would appoint one or more of its officers as the Ombudsman for Digital Transactions who would redress the customer complaints against the prepaid instrument issuer. However, to strengthen the grievance redressal mechanism at the entity level itself and to minimize the need for the customers to approach other fora for redressal, the RBI has introduced another rung for grievance redressal at the prepaid payment issuer-level by mandating an Internal Ombudsman (IO) for non-bank PPIs, similar to IOs for banks. The IO would be placed at the highest level of internal grievance redressal mechanism and would be an independent authority to review complaints that were partially or wholly rejected by the respective PPIs. This would bring about a swifter resolution of customer complaints and increase the confidence in digital transactions among users.
The writer is CEO, BankBazaar.com