The RBI has cut rates for the third time in the past year. What does this mean for you as a borrower and investor? Find out.
The Reserve Bank of India (RBI) has decided to cut the repo rate by 25 basis points for the third time in a row. Now the repo rate stands at 5.75%. Now, what is the repo rate? Repo rate is the rate at which our Central Bank lends to commercial banks in the country. When this rate is reduced, banks will cut their lending as well as deposit rates.
Why have the rates been cut? The RBI policy statement says “a sharp slowdown in investment activity along with a continuing moderation in private consumption growth is a matter of concern. The headline inflation trajectory remains below the target mandated to the MPC even after considering the expected transmission of the past two policy rate cuts.” In other words, to maintain inflation at the right levels and promote the growth of the economy, RBI has cut interest rates.
What does this mean for you?
As a borrower, this means your loan rates will go down, especially those of Home Loans. Yay! Banks like State Bank of India have already cut rates by 5 basis points.
But fixed-rate loans do not change (unless it is fixed for a certain period). On the other hand, floating loan rates change along with the rates in the country. This is why you should opt for floating-rate loans when interest rates are falling. Note that many loans including Home Loans and Personal Loans come with floating rates. So, choose your loan carefully.
While this is good news for borrowers, it is bad news for investors, especially those who’ve invested in fixed-income securities such as bank Fixed Deposits. When banks reduce lending rates, they also reduce their deposit rates. Argh! But BankBazaar still has Fixed Deposits that will earn you 8.6% per annum. Isn’t that wonderful? Now, let’s find out more about the RBI rate cut.
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What are the experts saying?
Check out what the industry experts are saying about the latest rate cut by RBI.
Adhil Shetty, CEO, BankBazaar.com
Sujan Hajra, Chief Economist and Executive Director, Anand Rathi Shares & Stock Brokers
RBI carried out the third successive rate cut. Low inflation and subdued growth are the drivers of the move. Yet, the real concern is the lack of transmission of rate cuts into effective lending rates. Liquidity conditions also remain tight for a large part of the corporate sector. Effective transmission and adequate liquidity remain key challenges.
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Umesh Mehta, Head of Research, Samco Securities
This is the third consecutive time that RBI has cut rates by 25bps which shows that they are indeed taking care of the slowing growth and as expected are being supportive by loosening their purse. The Indian economy has been experiencing a slowdown with unemployment at 45-year highs, CPI inflation excluding food and fuel down to 4.5% in April from 5.1% in March and a revision by the RBI on the GDP for FY20 from 7.2% to 7% indicates just that.
This is positive for the Street, however, as the rate cut was in line with expectations which had already been factored in, the indices did not cheer the rate cut and continued to trickle down. If the international trade tensions continue to escalate further, the Fed might cut rates which will further create room for RBI to reduce rates in future.
B Prasanna, Group Head – Global Markets – Sales, Trading and Research, ICICI Bank
The policy was very positive and was reinforced by unanimous voting and the change in stance to accommodative. The statement’s focus on supporting growth and bolstering private investment as long as inflation remains within the mandate is also encouraging and leads us to believe that more accommodation is on the cards.
Our own expectations for growth and inflation for FY2020 also underscore this view as we expect headline inflation to average under 4% and have revised our growth forecasts lower. The internal committee for liquidity framework is a welcome step. It will help to reduce the information asymmetry regarding systemic liquidity and will benefit not only markets but also banking decisions as regards, deposit-taking, lending and transmission. Further, in light of the recent upheavals in the NBFC space, the Governor’s statement that all necessary steps would be taken to maintain financial stability is reassuring.
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Ramesh Nair, CEO & Country Head, JLL India
As per the latest data by the Government of India, the economic growth has slowed down to a 20-quarter low of 5.8% during the last quarter of FY 2018-19. Also, the consumption has remained weak during the past several months due to the ongoing liquidity crisis, in spite of controlled inflation under 4%. These trends have propelled RBI to reduce the repo rate for the third consecutive time to 5.75% from 6.0%. Even on the global front, factors like trade tensions and expected global economic slowdown had a bearing on the decision. The change in policy stance to ‘accommodative’ is the much-needed measure to boost the economy.
The monetary policy decision to cut the policy rate is laudable. As the residential sector is already at inflexion point signalling a sustainable recovery, this decision will support the trend. This repo rate cut is likely to have a direct impact on the real estate sector, provided the banks, in turn, transmit the same by a corresponding reduction in lending rates. It has been observed that, despite 50 bps reduction in repo rates by RBI in the previous two reviews, the mortgage interest rate has remained sticky. As a result, the required benefit of the rate cut has not reached the home buyers.
However, with regulations reinstating homebuyers’ confidence in the segment, markets witnessed recovery in sales in 2018. Further, in the January-March quarter of 2019, sales grew by 28% as compared to the corresponding quarter in 2018. But commensurate transmission in interest rates will further boost residential sales momentum in 2019. Stronger implementation and continuity of reforms under the second term of the current government will uplift homebuyers’ sentiment.
Shishir Baijal, Chairman & Managing Director, Knight Frank India
The first rate cut in the newly elected government’s regime is certainly a welcome step, especially for the real estate sector. The benefit of the lower policy rate in terms of better credit cost as well as higher liquidity will hopefully be transmitted further by banks to NBFCs as well as home buyers. Also, the change in policy stance from neutral to accommodative is a welcome shift as it lays the ground for further rate cuts.
The cash-crunched NBFCs will definitely benefit from the inflow of capital which will, in turn, benefit developers as well as home-buyers. NBFCs have been facing a liquidity crisis and this has negatively impacted their loans to real estate, including construction finance. Besides capital infusion into this important financier segment, this rate cut will also improve the home-buyers affordability and stimulate housing demand at this critical juncture.
Suvodeep Rakshit, Sr. Economist, Kotak Institutional Equities
RBI reduced repo rate by 25 bps as expected. The change in stance to ‘accommodative’ was a bit of a surprise. Debt markets will take this as a significant positive move as most of the rate cut cycle is probably over. The tone of the RBI policy was dovish and highlights the concerns on growth. We maintain our call for another 25 bps rate cut in August factoring in the benign inflation trajectory and the growing concerns on growth. However, the transmission of the rate cuts will be key and the RBI should aim to maintain the liquidity, at least, at neutral over the next few months.
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So, this might be the right time for you to go for those loans and stock investments. Ready?