The Reserve Bank of India’s Monetary Policy Committee has decided to maintain the status quo on the key policy rates. The repo rate, which was at 6.50 has been left unchanged in today’s bi-monthly meeting, which is a welcome move. After increasing the repo rate by 250 basis points since May 2022, to curb inflation, the RBI has pressed pause on the repo rate hike to check the central bank’s progress thus far, sending positive sentiments across sectors. Here is what it means for you.
Home Loan Borrowers
The RBI has raised the repo rates by 250 basis points over the last year. As a result, retail loan rates have gone up, putting additional burden on the borrowers. Home Loan borrowers, in particular, are seeing their tenors increase from 20 years to 50 years. Since long tenors cannot be extended beyond the retirement age, the only remaining option is to increase EMIs, which may not be feasible for all borrowers. RBI’s latest decision to keep the repo rate unchanged will bring relief for home loan borrowers, reeling under the pressure of lengthening loan tenors and rising interest rates.
If you are servicing a Home Loan, lowering your debt burden should continue to be your priority. This is where refinancing to a lower rate can help. On Home Loan interest rates, even as the benchmark repo rate has increased, spreads have fallen. Spreads are what banks charge over and above the repo rate. Today, the lowest spreads over the repo are 1.90-2.00%. Having a lower rate helps in pulling back your rising loan tenor and thus saving your money. You can also consider voluntarily hiking your EMI, and pre-paying wherever possible.
Bank deposits are trending nearly at peak rates. You can lock into these rates for the long term – that could be three, five, or even ten years. Remember that FDs are ideal short-term cash holdings for young investors and as interest income for the elderly. In both cases, however, they won’t provide inflation-beating returns, for which one should explore the financial markets. As and when interest rates fall, bond mutual funds may be able to deliver higher returns than FDs, and equity mutual funds may benefit from the optimism the markets associate with a pullback in inflationary trends.
Stock markets might see the short-term appreciation on the back of this announcement. The long term remains to be seen but the outlook gets optimistic. Long-term debts will appreciate, and bond fund NAVs should rise in the short term.
Credit Information Companies (CICs) To Be Under RBI
In a landmark move, the RBI has brought CICs under the aegis of its integrated ombudsman scheme (RBIOS) and put in place a compensation mechanism for delayed updation or rectification of credit information. This has been a demand of consumers who have sometimes had to shuttle between the credit institution and the CIC to resolve issues in credit reporting. The SMS and email alerts each time the score is checked would give consumers greater control and visibility over hard checks on their Credit Score. As Credit Score and history is directly linked to the eligibility for accessing credit and rate of interest at which credit can be accessed, there has been a tremendous increase in financial awareness of Credit Score in India. In fact, free Credit Score is the most popular tool used by customers at BankBazaar to track and improve their Credit Score via good repayment behaviour. This RBI move is timely and has become more urgent in recent times, with the proliferation of unauthorized lending apps. Having a recourse to raise issues transparently, coupled with resolution timelines and penalty for non-compliance will not only make the error reporting and resolution process at the CICs more transparent, but it will also increase the trust of consumers in these CICs by leaps and bounds.
RBI’s proposal to expand the scope of the United Payments Interface (UPI) was yet another highlight of today’s meeting, one that will encourage further innovations. Up until now, UPI could be linked to bank debit accounts and RuPay Credit Cards for making payments. Today’s announcement adds to UPI’s existing benefits and will enable customers to link their credit accounts, including loan accounts, making them accessible for payment via UPI. This will help to simplify customers’ utilisation of credit by leveraging the flexibility that UPI has to offer.
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