The Reserve Bank of India has cut the repo rate (the rate at which it lends to other banks) by 50 basis points, or 0.5%. In a move that caught many sections of investors by surprise, the Fourth Bimonthly Monetary Policy Review of the RBI reduced the repo rate to 6.75%, down from 7.25% earlier.
This follows a clamor by large sections of industry and industry-watchers for substantial repo rate cut owing to dipping inflation figures. The markets reacted instantly with a 350+ point salute, according their approval. The CNX Nifty registered a 100 point jump at the announcement this morning.
Additional reading: 6 Hard-nosed Facts You Need to Know When Inflation Gets Deflated
So, evidently the markets are happy. Industry captains and businesses are happy. But, what does this repo rate cut mean for you as an individual borrower or investor?
First off, if you are an existing loan customer of any of the Public Sector or private banks and had opted for a floating rate loan, you can look forward to a rate cut in your loan. If your bank reduces its base rate, the reduction would immediately reflect with a similar reduction in your loan rate.
Some banks have already affected rate cuts following the RBI announcement. SBI’s base rate plunged from 9.7% to 9.3%, a drop of 0.4%, while Andhra Bank has slashed its base rate from 10% to 9.75%, a reduction of 0.25%.
Now, let’s assume you’re planning to buy some property. In the backdrop of a slowing economy, the real estate sector is facing some headwind and is currently sluggish. Even if price corrections may not be drastic, there is some expectation of deal-sweetening offers along with some finite price correction.
Additional reading: Slowing Indian Economy: How Indian Property Investors are Poised to Gain
In the event that you are planning to take a home loan to shore up your funding for the property, there are two possibilities.
Case 1: Let’s say you’re considering taking a home loan of Rs. 50 lakhs for 20 years on a floating rate basis.
With a drop of 0.4% in the home loan rate, your EMI has fallen by around Rs. 1,300 while your total interest outgo over the loan tenure has dropped by around Rs. 3.15 lakhs. With a drop of 0.25% in your home loan rate, these savings would be approximately Rs. 800 and Rs. 2 lakhs respectively.
Case 2: Let’s say you’ve already taken a home loan of Rs. 50 lakhs for 20 years on a floating rate basis and have completed 5 years of repayment. That is, you have 15 years remaining in the loan tenure.
With a drop of 0.4% in the home loan rate, your loan’s terms will be restructured. Your bank may give you the option of EMI reduction or tenure reduction.
With EMI reduction, you continue to service your loan for the remaining 15 years but save around Rs. 1,100 in EMI and around Rs. 1.95 lakhs in total interest outgo.
With tenure reduction, your EMI remains the same but you can end the loan approximately 9 months earlier and save interest amount of around Rs. 4.25 lakhs in the process.
In either case, consider it a Diwali bonus from the RBI!