The Reserve Bank of India (RBI) recently met on 7th June, 2017 to review their policies and have decided to keep the interest rates as they are. The repo rate will stay at 6.25%.
If you aren’t familiar with the repo rate concept then allow us to explain. The repo rate is the rate at which the RBI lends to all commercial banks in the country. So, banks borrow money from RBI at that rate.
What does this mean to you? If the repo rate is going to remain the same, then there is very little possibility of banks cutting deposit and lending rates until the next RBI policy meet. But, why did the RBI decide to leave the rates unchanged? According to the RBI’s policy statement, “The decision of the MPC is consistent with a neutral stance of monetary policy in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 per cent within a band of +/- 2 per cent, while supporting growth.”
How will this affect you?
Got loans? Floating rate ones? Then, this might not be good news. If the RBI keeps rates unchanged, then your lender might also decide not to lower rates any further. If you have started enjoying lower loan rates in the recent past, then you will have to wait till the next RBI policy meet to check if rates will fall further. Note that this is applicable only if you have floating rate loans. Why? Because only these loan rates are reset when RBI changes the interest rates.
Planning to go in for a loan now? Then it might be better to choose between fixed and floating rate loans. This is because loan rates have already come down significantly in the past 3 years. This goes for Car Loans, Home Loans, and Personal Loans.
Are you an investor? Then this is good news for you. If you have made investments such as bank Fixed Deposits, you can breathe easy. Fixed Deposit rates might remain stable until the next RBI policy meet.
Expert Speak
Want to know what industry experts are saying about the latest monetary policy? Read on to find out.
Chanda Kochhar, MD and CEO, ICICI Bank
“The RBI’s acknowledgement of downward shift in the inflation trajectory is welcome. It is also heartening that the RBI has again reiterated its focus on resolution of stressed assets, which will help to strengthen the banking system and ensure that investments made are optimally utilised. The SLR cut and reduction in risk weights for housing loans are positive moves that will support bank liquidity and encourage growth in housing loans.”
Sunil Sharma, Chief Investment Officer, Sanctum Wealth Management
“Net-net, a policy hike looks to be off the table, inflation is likely to remain muted and rural demand is expected to strengthen. Given the RBI stated concerns on easing prematurely and having to reverse later, with the attendant loss of credibility, the likely path for forward policy remains neutral.”
Arvind Chari, Fixed Income Team, Quantum Asset Management
“That the RBI would leave the Repo rate unchanged at 6.25% was expected, but what we were looking for was its assessment of future inflation and for a divergence in the views of the Monetary Policy Committee (MPC) members. We seem to have got both, the RBI has lowered its inflation projection for FY 18 taking into account recent inflation data. As also for the first time the MPC voted 5-1 to hold rates, which means that one member possibly voted for a rate cut. This does open up the scope for a rate cut in the August policy, if monsoon progresses as expected and if global conditions continue to remain favourable.”
Murthy Nagarajan, Head Fixed Income, Tata Asset Management
“The statements from RBI is dovish. RBI has guided the CPI inflation to 3.5 -4.5 % for March 2017. Viral Acharya, the deputy governor has stated the data of CPI and GDP has surprised on the downside which could allow the RBI to follow an accommodative stance if the data persists. The market may expect RBI to cut rates in the coming policy”.
Sivakumar, Head – Fixed Income, Axis Mutual fund
“The RBI left rates unchanged in the MPC meeting today. The meeting saw the first dissent from Dr Ravindra Dholakia. Dr Dholakia had projected lower inflation than the RBI baseline in the last policy statement. The fall in inflation over the last six to eight months is now seen to persist for a while and the RBI now expects that inflation by the end of the current financial year will be close to its target of 4%. If inflation remains low, this could result in rate cuts in the months ahead. In particular the outlook for inflation has improved thanks to persistent low food inflation and non-inflationary GST rates. The risk of any rate hike in the coming months has receded.”
It doesn’t matter if you are a borrower or an investor. It is prudent that you keep track of interest rates in the country. Interest rates will determine how much you shell out for your loans and how much you receive as interest. Ideally, you should earn more and pay less, right?
Got questions on money management? Feel free to write to us using the comments section below. Whether it is a financial query or a financial product that you need, we are always around!
RBI should have lowered lending interest rates so as to put life in industries which are providing employment.
Thanks
Alliance Research
Hey there,
We agree! That would have benefited a lot of borrowers as well. Nevertheless, we have to deal with it now.
Cheers,
Team BankBazaar