RBI policy: RBI keeps the repo rate unchanged; impact on loans and deposits, what should depositors, borrowers do now?

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While borrowers may breathe a sigh of relief, depositors have no immediate respite from one of the lowest term deposit interest rates as their wait has grown a little longer. The Reserve Bank of India (RBI) decided to keep the repo and reverse repo rates unchanged at its bi-monthly monetary policy meeting held on February 10, 2022. Hence, the repo rate and reverse rate remain at 4% and 3, 35%, respectively. More than 20 months have passed since the last change in the repo rate when it was cut to 4% on May 22, 2020, the lowest rate since April 2001.

Without a change in key rates, there will be no immediate impact on the EMIs of your home loan, car loan and personal loan. Lenders generally prefer to take some time to take a call regarding any possible rate changes in the future based on their own financial situation and expectations regarding interest rate movement.

In the future things might change. The central bank has found the middle ground between economic growth and inflation. As corona-related restrictions have had a negative impact on economic growth, the RBI has so far focused on reviving growth. However, many indicators suggest that inflation could soon become a concern.

If we follow the global trend, all the indicators lead to an increase in inflation in the coming months. In the United States, retail price inflation reached a record high of 7% in December 2021. To keep future inflation under control, the US Federal Reserve already gave a signal to raise rates on January 27, 2022 in March 2022. 10 years

Retail inflation in India, as measured by the Consumer Price Index (CPI) for December 2021, hit its highest level of 5.59% in the past 5 months. The central bank’s primary focus will shift to its core mandate of managing retail price inflation and ensuring it remains within the 2-6% range. A rise in domestic retail price inflation in the coming days may also force the RBI to raise policy rates in the future.

With a possibility of rate hikes in the near future, India’s G-Sec rate, which is a benchmark for interest rates in a country, has already risen from 6.46%% on January 3, 2022 to 6.74% on January 27, 2022 in less than a month.

Here’s what’s likely to happen to deposit rates in the future and what depositors should do.

Short-term deposit rates may rise first

Whenever the interest rate cycle turns around from the bottom, it is usually short and medium-term interest rates that are likely to rise first. As for long-term interest rates, it will take a little longer for these rates to rise significantly.

Avoid locking in longer-term deposits at a lower rate

If you are planning to book an FD now or are looking to renew your existing FD, it will be best to opt for a shorter term deposit, say a year or less, so that your deposit is not locked in at a lower rate for a long time. Whenever the short and medium term rates increase, you can start increasing the duration of the FDs accordingly.

Impact on borrowers

With RBI maintaining the status quo, banks are unlikely to raise interest rates on loans in the immediate future. However, the lowest interest rate regime may not last long now. Here’s a look at how existing borrowers and those looking to take out a new loan (whether it’s a home loan, car loan or personal loan) can take advantage of the break from RBI.

What should mortgage borrowers do?

The interest rate is the most critical factor that determines the amount you pay for your borrowing, i.e. your loan. Since home loans are the longest loans for most borrowers, any change in interest rates has a significant impact on the overall interest payment over the remaining term of the loan.

More time for new borrowers: Most home loans are granted at variable rates. RBI had made it mandatory since October 1, 2019, for all floating rate retail loans from banks to be linked to an external benchmark such as the repo rate. Most banks have used the repo rate as a benchmark for their home loans. With the repo rate at the lowest level seen in the past two decades, the continuation of the low interest rate regime bodes well for borrowers.

With no increase in the repo rate, a new borrower who plans to take out a home loan in the near future can still get loans at the low prevailing rates for a while.

Existing borrowers should review and act on: No change in the repo rate means existing home loan borrowers will continue to pay their EMIs at the same interest rate. However, if your loan is more than 5 years old, it will be a good idea for you to check the interest rate regime (i.e. BPLR, base rate, MCLR or external benchmark rate (EBR)) under which your loan is currently outstanding.

If you haven’t transferred your loan to an external reference linked loan, chances are you’ll be paying a much higher interest rate than lenders charge on the new external reference linked home loan. If you are paying a higher rate, you can ask your existing lender to convert your loan to an EBR-linked loan for which you may have to pay a nominal conversion fee.

However, if your lender does not offer this facility or charges a higher rate even on an EBR-related home loan, you may consider switching your loan to a new lender. Being a variable rate loan, there is no penalty for changing. This means that the only factor you need to check is the new lender’s processing fees and fees and compare that with the interest benefit you would get from the switch. If the net profit sounds good to you, you can move on. Experts suggest that borrowers should consider a balance transfer when the interest rate reduction is 0.5% or more.

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Home loan linked to the repo rate: Here are the interest rates for home loans linked to the repo rate

Car loans

The maximum duration of a car loan varies between 5 and 7 years. Depending on whether you are considering taking out a new loan or are an existing borrower, you can use this break in the repo rate to your advantage.

New borrowers: Most auto loans are still funded on a fixed interest rate basis, meaning whatever interest rate you get when you get the loan , it will remain fixed for the duration of the loan. Hence, when one takes the loan becomes critical.

So if you enter at a low interest rate (like now), you can enjoy the benefit of lower EMI payments throughout the life of the loan, even when the bank raises its overall interest rate. For example, currently you can get a car loan from SBI at its lowest rate of 7.20% per annum or from HDFC Bank at its lowest rate of 7.05% per annum.

So if you haven’t decided which car to buy yet, with the RBI’s pause on rates you now have more time to make your purchase decision as the banks are unlikely to raise rates if early.

Existing borrowers: If you took out your loan when rates were higher, say 2 years ago, and you find that the current rate is much lower, you may consider switching your loan to another lender. But before you do that, check your loan agreement for foreclosure fees that are typically charged on a fixed rate loan. If the foreclosure fees are low and the benefit of getting a lower rate from another lender is greater, then you will need to calculate the net benefit of switching to a new lender.

Personal loan

New borrowers should use an extra window: Also in the case of personal loans, banks are unlikely to raise rates any time soon. So if you’re considering taking out a personal loan, be sure to keep your credit score with you so you can verify the best rate based on your credit score. The higher your credit score, the better your chances of getting a loan and that too at a good interest rate.

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A 50 point increase in your credit score can save you as much on loan interest payments

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How to maintain an optimal credit score

Existing borrowers should look for cost savings: If you are an existing personal loan borrower, there is not much you can do because a personal loan is usually granted in the form of a term loan with a fixed interest rate. However, if you are paying a much higher rate, say over 16%, it would make sense for you to check the rates of other lenders to see if they offer loans at lower rates and then make the switch. Personal loans are usually for shorter terms, often 3 to 5 years, so a switch can result in good savings when you do it in the first half of the repayment period. This is because in the first half of your repayment term, the main component of your EMI is the interest amount, so any change has a greater impact in the form of a reduction in the interest amount.

Also Read: Personal Loan Interest Rates 2021: Comparison of Best Personal Loan Rates from Banks

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