RBI keeps REPO Rate unchanged

The corona related restrictions had an adverse impact on economic growth, resulting in the RBI Monetary Policy going on a reviving growth. Repo rate remained unchanged in the RBI Policy on Feb 10, 2022.  However, there are many indicators which hint that inflation may show a different picture which may cause a concern.

• While borrowers can breathe a sigh of relief, however depositors have no immediate respite from one of the lowest interest rates on fixed deposits as their wait has got a little longer.
• The Reserve Bank of India (RBI) has decided to keep the repo and reverse repo rateunchanged in its bi-monthly monetary policy meeting held on February 10, 2022. Consequently, the repo rate and reverse rate remain at 4% and 3.35%, respectively.
• It has been more than 20 months since the last change in repo rate when it was reduced to 4% on May 22, 2020, which is the lowest rate since April 2001.

Effects of REPO Rate Changes:

• With no change in the policy rates there will be no immediate impact on the EMIs on Home loan, Auto loan and Personal loan. Lenders will typically prefer to take some time in taking a call about any possible rate change in future, based on their own financial position and their expectation about the interest rate
• Going by the global trend all indicators are leading to higher inflation in coming months. In US the retail inflation has risen to a record high of 7% in December 2021. To keep future inflation under control, the US Federal Reserve on January 27, 2022 has already given a signal of hiking rates in March 2022.
• The retail inflation in India measured by consumer price index (CPI) for December 2021 has risen to highest level of 5.59% in last 5 months. The primary focus of the central bank will shift to its core mandate which is to manage retail inflation and ensure that it remains within the range of the 2-6%. A higher domestic retail inflation in coming days may also compel the RBI to increase the policy rates going forward.
• With a possibility of rate hike in near future the G-Sec rate of India which is a benchmark of interest rate in a country has already risen from 6.46% % on January 3, 2022 to 6.74% on January 27, 2022 within a span of less than a month.

Effect on Deposit Rates:

2. Short term deposit rates may increase first
   Whenever the interest rate cycle makes a U-turn from the bottom, it is typically the short to medium term interest rates that are likely to rise first. As far as long-term interest rates are concerned, it will take a little longer for these rates to go up significantly.
3. Avoid locking deposits for longer term at lower rate
   If you are planning to book an FD now or are looking to renew your existing FD, then it will be better to go for shorter term deposit, say one year or lower, so that your deposit is not locked at a lower rate for long. Whenever the short to mid-term rates rise, you can start increasing the tenure of the FDs accordingly.
4. Impact on borrowers
   With RBI maintaining status quo, banks most likely will not increase interest rates on loans in immediate future. However, the lowest interest rate regime may not last long now. Here is a look at how existing borrowers and those looking to take a new loan (be it home loan, car loan, or personal loan) can take advantage of RBI’s pause.

4. What should home loan borrowers do?
   Interest rate is the most critical factor which decides how much you pay for your borrowing, i.e., your loan. With home loans being the longest tenure loans for most borrowers any change in interest rate has considerable impact on the overall interest payment during the remaining tenure of the loan.

5. More time for new borrowers

• Most of home loans are given on floating rate basis. RBI had made it mandatory since October 1, 2019, for all floating rate retail loans from banks to be linked to an external benchmark like the repo rate.
• Most banks have used the repo rate as the benchmark for their home loans. With repo rate being at the lowest level seen in the last two decades, a continuation of the low interest rate regime bodes well for borrowers.
• With no hike in repo rate, a new borrower who is planning on taking a home loan in the near future can still get loans at prevailing low rates for some more time.

6. Existing borrowers must review and act

• No change in the repo rate means that existing home loan borrowers will continue paying their EMIs at the same interest rate. However, if your loan is more than 5 years old, then it will make sense for you to check the interest rate regime (i.e., BPLR, Base Rate, MCLR or External Benchmark Rate (EBR)) under which your loan is currently running.
• If you have not shifted your loan to an external benchmark linked loan, then it is quite likely that you may be paying a much higher interest rate than what is being charged by lenders on the new external benchmark linked home loan. In case you are paying a higher rate you may ask your existing lender to switch your loan to a loan linked to EBR for which you may have to pay a nominal switching fee.
• However, if your lender is not offering this facility or is charging a higher rate even on an EBR linked home loan, then you may consider switching your loan to a new lender. Being a floating rate loan there is no penalty for switching. This means the only factor that you have to check is the processing fee and charges of the new lender and compare it with the interest advantage that you would get from the switch. If the net benefit appears attractive you can make move. Experts suggest that borrowers should consider balance transfer when the interest rate reduction is 0.5% or more.

7. Car loans
   The maximum tenure of an auto loan ranges between 5 years and 7 years. Depending upon whether you are planning on taking a new loan or are an existing borrower, you can utilize this pause in the repo rate to your advantage.
8. New borrowers:

Most of the car loans are still being financed on a fixed interest rate basis, i.e., whatever interest rate that you get at the time of getting the loan, will remain fixed during the entire tenure of the loan. Therefore, when one takes the loan becomes critical.

• So, if you enter at a low interest rate point (like at present), you can enjoy the advantage of lower EMIpayments throughout the tenure of the loan even when the bank increases its overall interest rate. For instance, currently, you can get a car loan from SBI at their lowest rate of 7.20% per annum or from HDFC Bank at their lowest rate of 7.05% a year.
• So, if you are yet to make up your mind about which car to buy, with the RBI’s pause on rates, you now get some more time to come to your purchase decision as banks mostly likely will not hike rates any time soon.

9. Existing borrowers:

If you took your loan when rates were on the higher side, say 2 years ago, and find the current rate to be much lower, then you can consider switching your loan to a different lender. But before you do that, do check your loan agreement for the foreclosure charge which is typically charged on a fixed rate loan. If the foreclosure charge is low and the advantage of getting a lower rate from another lender is higher, then you will need to calculate the net benefit of switching to a new lender.

10. Personal loan
    New borrowers should utilize extra window: In the case of personal loans too, banks are unlikely to hike rates soon. So, if you are planning on taking a personal loan, do make sure to keep your credit score with you so that you can check the best rate based on your credit score. The higher your credit score, the better are your chances of getting a loan and that too at a good interest rate.
11. Existing borrowers should look for cost saving:

If you are an existing personal loan borrower then there is not much you can do as a personal loan is given typically in the form of a term loan with fixed rate of interest. However, if you are paying a much higher rate, let us say above 16%, then it would make sense for you to check the rates of other lenders to see if they are offering loans at lower rates and then make the switch. Personal loans are typically for shorter tenures, often 3-5 years, therefore, a switch can result in good savings when you do it in the first half of the repayment period. This is because in the first half of your repayment tenure the major component in your EMI is the interest amount, so any switch has a higher impact in the form of interest amount reduction.