Impact of RBI Rate Cut on Loan EMI

The Reserve Bank of India has recently raised the repo rate by 25 basis points (bps). This is according to the third bi-monthly monetary policy review 2018-19 published on 1 August 2018. With this hike, this is the 2nd time in last 2 months that RBI has increased the repo rate.

Earlier, it hiked the repo rate by 25 bps or 0.25% on 6 June 2018 during its second bi-monthly monetary policy review 2018-19. Owing to this latest hike announced by the central bank, the repo rate has now increased from 6.25% to 6.50%. This key lending rate at which RBI lends money to banks is revised as a part of its attempt to control the high moving inflation in the country. The RBI has also raised the reverse repo rate by 0.25% and currently it stands at 6.25%. The marginal standing facility (MSF) rate have also increased to 6.75% from 6.50%. Moreover, RBI has also hiked the overnight MCLR to 7.90% - 8.05%. As a matter of fact, 1 basis point or bps of repo rate is equal to 1/100 of a percentage.

After the repo rate hike on 6 June 2018, many banks have increased their marginal cost of funds-based lending rate (MCLR) in response to the announcement made by the Reserve Bank of India. So, it is expected that due to this hike in the repo rate, the overnight MCLR, and the Marginal Standing Facility (MSF) Rate, the lending rates of the banks will again go up. This is anticipated to have a direct impact on the amount of EMI that customers pay for their loans. With the MCLR rates imposed by the banks increasing post the hike, loans are likely to become quite expensive for the customers.

What is Repo Rate?

Borrowers take loans from banks and financial organizations, who provide these loans after charging a certain amount of interest. Therefore, the rate at which the borrower takes the loan is known as the Cost of Credit. In the very same manner, banks and financial organizations borrow money from the Reserve Bank of India by selling their surplus government securities. The rate at which they sell these securities to the RBI is known as the Repo Rate, also known as the Repurchase Rate.

A high Repo Rate will result in higher cost of short-term funds. Similarly, if the Repo Rate is low, it automatically brings down the amount of interest which banks will have to pay on the borrowed funds. Therefore, if the Repo Rate is low, it allows banks to charge lower interest rates on the loans which they offer to their customers. Additionally, a lower Repo Rate can also contribute greatly towards generating a positive growth of the economy.

Impact of Current Repo Rate on Loan EMIs

The repo rate that increased on 1 August 2018 will have an impact on both the existing and future borrowers. It generally takes a while after the repo rate is announced depending on the category of borrower you fall in to know the impact of the changes. To begin with, the bank you are associated with might increase the Marginal Cost-based Lending Rates (MCLR). The increase in the Marginal Cost-based Lending Rate will cause the EMI on your loan to go up.

The change in the repo rate is likely to result in an increase in the interest to be paid on a loan irrespective of whether it is a car loan, personal loan or home loan.  This is because the repo rate is the rate at which all the banks borrow money from the Reserve Bank of India. The rise in these rates usually tends to have a direct impact on the interest to be paid by the customers.

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Impact of Current Repo Rate on Existing Loan Borrowers

Existing loan borrowers will not see changes in their EMI amount even though many banks have changed their MCLR in response to the hike rate by RBI. There is however, a possibility of a change in loan tenure. This will in turn increase the effective cost of the loan as the number of EMIs to be paid will go up.

The long-term interest paid by a borrower to the bank will eventually go up as a result of an increase in the interest rate that will have to be paid to the banks. This will in turn make the overall loan a little more expensive. If you do not want to make any immediate changes to the loan structure, you can always decide to wait and observe the impact that the repo rate hike will have on the loan. Depending on the impact, you can choose to make changes.

One method to reduce the impact of these hikes on interest rates is to make a pre-payment to the bank. Pre-payment can help reduce the total amount of interest you will be paying to the bank. This option is suitable for those who are just starting out their loan tenure. One can also try to increase their savings and investments and pre-pay their loan in order to ensure that the interest paid does not exceed than what you would pay normally. For loans that are nearing the end of their tenure, it is best to not many any changes and try to maintain the loan till the tenure ends.

With RBI announcing to increase the repo rate on 1 August 2018, recent loan borrowers will mostly face an increase in the amount of EMI to be paid depending on their loan tenure. In case the effect of the increase in the repo rate on your loan is high, you also have the option to transfer your loan to another banks after comparing the loan rates they offer and choose the offer most suitable for you.

Read About Impact of RBI Rate Cut on Loan EMI

  • PNB announces new MCLR rates

    Punjab National Bank has released the new Marginal Cost of Funds Based Lending Rate (MCLR) that will be effective from 1 August 2018. The new rates are as follows:

    • Overnight MCLR - 7.90%
    • One-month MCLR - 8.05%
    • Three-month MCLR - 8.20%
    • Six-month MCLR - 8.40%
    • One-year MCLR - 8.45%
    • Three-year MCLR - 8.60%
    • Five-year MCLR - Discontinued

    2 August 2018

  • Board of Management proposed for urban co-operative banks by RBI

    Urban co-operative banks will have to get a board of management set up by the board of directors in order to take care of daily business operations. The Reserve Bank of India has further added that the members of this board should be qualified and should not have any relations with the bank. The RBI expects urban co-operative banks to get a separate board of management in order to strengthen governance standards. The board of management could be appointed by the board of directors but both their terms will end at the same time. The RBI further stated that board members should have specialised qualification in economics, finance, law or IT and RBI has the full liberty to remove any member who fails to meet the criteria.

    27 June 2018

  • 5 basis point hike in MCLR by Bank of Baroda

    Bank of Baroda has recently announced an increase in its marginal cost of funds based lending rate (MCLR) by 5 basis points. This will be effective from 7 June 2018. BoB is the latest bank to increase its MCLR in the recent past. The State Bank of India, Kotak Mahindra Bank, ICICI Bank, and Union Bank of India have hiked their MCLR before BoB.

    The MCLR for Bank of Baroda will be as follows, effective 7 June 2018:

    • Overnight - 7.95%
    • One Month - 8%
    • Three Month - 8.10%
    • Six Month - 8.30%
    • One Year - 8.45%

    The hike in MCLR implies that the EMIs of existing borrowers will be affected at the time of reset of the loans. The reset date is usually decided on the basis of a mutual agreement between the borrower and the bank at the time of loan agreement. The EMIs for the future will be calculated based on the MCLR rate and the margin effective on the date of reset.

    7 June 2018

  • NBFC’s Offer Financing For Pursuing Offbeat Courses

    Individuals who are looking to avail education loans to pursue offbeat courses such as culinary arts, filmmaking, photography and others can approach non-banking financial corporations. NBFCs and banks have their own set of rules and guidelines for offering education loans, but banks are rather reluctant when it comes to offering education loans for offbeat courses. NBFCs, on the other hand, are a little more receptive to such customers. While some banks approve of loans for such courses, they usually take a longer processing time while NBFCs try to disburse the amount as soon as possible. Both NBFCs as well as banks take collateral when offering such loans depending upon the amount borrowed. There is not much difference in the processing fees charged by the two types of financial institutions either, making NBFCs a more reliable option in comparison with banks.

    21 May 2018

  • A flexible funding option offered by Bajaj Finserv for security investments

    Bajaj Finance Ltd. which is the lending arm of Bajaj Finserv is offering the investors of mutual funds, bonds, insurance, and securities a flexible funding option. Through Bajaj Finserv Loan Against Securities, investors can get quick funding by pledging their securities like Bajaj Allianz ULIP, IPO financing, ESOP financing, mutual funds, bonds or shares in favour of the company. The minimum loan amount customers can avail is Rs.5 lakh and the maximum is Rs.100 crore under the loan against securities scheme. The process requires minimum documentation which is a benefit and the scheme also offers a high loan value.

    17 April 2018

  • RBI implements special measures for government transactions on 31 March 2018

    On 28 March, the Reserve Bank of India (RBI) has announced special rules for the transactions of central and state government accounts by banks handling government businesses on 31 March, the last day of the financial year. Keeping the best interests of the taxpayers in mind, the RBI offices and its branches that carry out government business will be open until 8:00 pm on 31 March. Furthermore, electronic transactions will be permitted until midnight. To carry out special clearing operations, arrangements have been made in an effort to facilitate government payments and receipts. NEFT and RTGS centralised payment systems will be functional for extended business hours. However, 2 April has been declared as a holiday to facilitate banks to close their yearly accounts. Therefore, NEFT and RTGS will not be functional on 2 April 2018.

    3 April 2018

  • MPC to meet on 4th and 5th April 2018 to decide on bi-monthly monetary policy

    Urjit Patel, the Governor of Reserve Bank and 5 other experts on the Monetary Policy Committee (MPC) will meet on 4th and 5th of April to take a call on the fluctuating interest rate in a climate of declining retail interest rate. The MPC will meet to decide the first bi-monthly monetary policy of the FY19. The Reserve Bank of India (RBI) has retained the key short-term lending rate at 6% in the last 3 bi-monthly policy reviews in order to restrict inflation to 4%. The retail inflation based on the Consumer Price Index was down to 4.44% in February. The RBI takes the CPI-based retail inflation into account while determining the policy rate. The MPC will meet 6 times in FY2018-19.

    23 March 2018

  • World Bank: India's GDP likely to grow at 7.3% in FY18-19

    According to the World Bank's India Development Update, a bi-annual report, India's Gross Domestic Product (GDP) is expected to grow at 7.3% in FY2018-19 and 7.5% in the subsequent fiscal year. Starting from 1 April, the projected growth rate by the Economic Survey is 7-7.5%. After the impact of demonetisation and the implementation of the Goods and Services Tax (GST), the Indian economy is expected to recover and slowly revert to a growth rate of 7.5%. In order to obtain an 8% or higher GDP growth, there has to be an effective implementation of existing structural reform in the banking, health, and education sectors, and also the need for regulatory supervision of the financial sector.

    16 March 2018

  • ICICI, Axis, and HDFC Bank offer better interest rates than PSBs

    Country’s top 3 private banks - ICICI Bank, HDFC Bank, and Axis Bank offer better interest rates when compared to their public sector bank (PSB) counterparts. Even the nation’s largest bank, SBI currently offers an interest rate of 6.5% on a period of 6 months and 1 year while HDFC offers 6% and 6.5% for the same term. However, on the fixed deposit (FD) side SBI does better than HDFC that offers only 6% by offering an interest rate of 6.5%.

    Considering the FD rates for the 1-year period, the top 3 private lenders (HDFC, Axis, and ICICI) fare better with an interest rate of 6.75% but is competed by public sector lender, Punjab National Bank (PNB) at 6.6%. SBI and Bank of Baroda offer an interest rate of 6.25% and 6.45%, respectively. In the 3-year period segment, Axis Bank provides a return of 6.9% while top 3 PSB’s i.e, PNB, SBI, and Bank of Baroda offer a rate of 6.5%. In the 5-year period, private sector banks offer better returns than the public ones.

    5 March 2018

  • RBI expected to keep rates unchanged in first half of the fiscal year

    The rising retail inflation, crude oil prices, and MSP are some of the factors that the Monetary Policy Committee (MPC) will wait and watch out for. According to Kotak Institutional Equities, the Reserve Bank of India will likely maintain status quo in the first half of the fiscal year. By June 2018, the Consumer Price Index (CPI) is expected to rise to 5.85%. For the 3rd time in a row, RBI has kept the key policy rate unchanged at 6%. Retail inflation is expected to rise to 5.1% in the last quarter of the fiscal year as a result of the increasing crude oil prices and an increase in the salary components of government employees.

    20 February 2018

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