RBI policy rate hikes – Impact on borrowers

By | August 5, 2010

As credit demand moves up typically in the third quarter, the bankers are unlikely to hike the lending rates before October. Also, the RBI has shot down the bank’s proposal of introducing a sunset clause for existing borrowers forcing them to switch to the new Base rate system. This means that banks will give attractive offers linked to the base rate to woo the existing borrowers. Therefore, it makes sense for existing borrowers to migrate to the new system.

The RBI has recently hiked the short term borrowing rate (Repo rate) and short term lending rate (reverse repo rate) by 25 and 50 basis points respectively. The spread between repo and reverse repo was also narrowed down. However, the apex bank kept the Cash reserve ratio (CRR) unchanged. It also announced that the monetary policy will be updated more frequently. So, what is there to be looked out in these policy changes for you? How do these policy changes affect your personal finances? Here is an article which elucidates the impact of key policy rates on your loan rates.

Repo rate, reverse repo rate, bank rate and CRR are the key policy rates which stipulate the interest rate in the economy. All these policy rates have a direct impact on the lending rate which is now benchmarked to the base rate replacing the erstwhile BPLR. To understand the impact of the policy rates, let us look into all these rates at a glance!

Repo rate is the short term interest rate at which the RBI lends money to banks. Bank rate is also similar to repo rate except for the fact that it is governed by long term monetary policies. When the repo rate increases, the interest rates on loans also moves up as bank has to fund these loans at a higher cost. Reverse repo rate is the rate at which RBI borrows fund from banks. It has similar impact on the interest rates on loan. Now since the RBI has narrowed down the spread between repo and reverse repo by 25 basis points and has announced that it will double the frequency of reviewing the monetary policy, the short term volatility in overnight rates will be reduced. This will bring stability in financial market. CRR is the percentage of cash deposits which banks maintain with RBI on an everyday basis. The increase in CRR will not lead to an immediate increase in interest rates. Only when the excess liquidity is sucked out and the credit demand picks up, the increase in CRR will result in increase in interest rate loans. All these rates collectively impact the financial market liquidity which in turn influences the interest rates of your loan.

Having said that, how these key policy changes will affect your home loan, car loan, personal loan or education loan?

Impact on Borrowers

Although the Apex bank has hiked the key rates, the home loan borrowers may not see any immediate hikes on their loan rates. This is because the bankers will assess the credit demand-supply situation before taking a call on lending rates. As credit demand moves up typically in the third quarter, the bankers are unlikely to hike the lending rates before October. Also, the RBI has shot down the bank’s proposal of introducing a sunset clause for existing borrowers forcing them to switch to the new Base rate system. This means that banks will give attractive offers linked to the base rate to woo the existing borrowers. Therefore, it makes sense for existing borrowers to migrate to the new system.

If you are planning to apply for a new loan, apply before these teaser loans expires. Teaser home loans provides attractive fixed interest rates for a period of 1-5 years and then an option to switch over to floating or to remain with fixed rate. Since, the interest rates are expected to move up in the near future, it is advisable to avail these offers. The impact on personal loans and car loans will also be on similar lines.

Impact on Students

The education loan was linked to the base rate with effect from July 1, 2010. The key policy rate hikes are not going to have an immediate impact on the base rate as bankers cannot change the base rate for the next three months. Hence, there won’t be any immediate impact on education loans. However, the rates could brace up in the long term.

Goods news is that the government may plan to cap the education loans at 2% over and above the base rate. This move could substantially reduce the funding cost for students who are currently availing loans at rates well above 11% under the previous prime lending rate regime whereas the base rate of most of the banks is in the range of 7 – 8.5%.

Therefore, if you plan to avail a student loan you may wait for some more time to get the benefits of any policy change from the government.

To conclude, RBI policy rate hikes won’t have any immediate impact on borrowers. However, in the long term, the rates will go up. As the loan rates are linked with the base rate, maintaining a good credit profile will ensure you get the best bargain with banks to lower the spread.

All information including news articles and blogs published on this website are strictly for general information purpose only. BankBazaar does not provide any warranty about the authenticity and accuracy of such information. BankBazaar will not be held responsible for any loss and/or damage that arises or is incurred by use of such information. Rates and offers as may be applicable at the time of applying for a product may vary from that mentioned above. Please visit www.bankbazaar.com for the latest rates/offers.

One thought on “RBI policy rate hikes – Impact on borrowers

  1. chidambaram udhaya s

    I have availed education loan for my son to study M S in U S A. from a private bank.The rate of interest is 16.25%.My question is whether Govt. & RBI have any slap for interest rate and about iterest subsidy.
    Kindly explain,
    Thank You,

    Reply

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