On 15th Jan 2015, the Bombay Stock Exchange index (BSE – Sensex) surged around 700 points, its biggest single-day gain in eight months. On the same day, major nationalized banks like Union Bank of India and United Bank of India cut their Base Lending Rates (BLR). The next day all major Newspapers carried an important headline and that is about “RBI cuts key interest rate.’”
Reserve Bank of India (RBI) has cut Repo Rate by 25 Basis points (0.25%) on 15th Jan, 2015. RBI Governor unexpectedly and surprisingly has cut interest rates for the first time in nearly 2 years. This had brought cheer to the Equity markets and the investors. (1% is equivalent to 100 basis points)
Latest update (04-Apr-2019) : The RBI cuts Repo Rate by 25 basis points to 6% from 6.25%. This is the second consecutive rate cut from RBI , after a surprise rate cut in February 2019.
What are these rates? Why a repo rate cut of just 0.25% is so important and powerful? What does RBI rate cut means to you and me? What is the impact of RBI’s rate cut on home loan and other loan EMIs (Equated Monthly Installments)? Is this the right time to buy a property through a home loan? Can we expect home loan interest rates to fall in 2015?….I believe you may have these questions running in your mind now????
To control/manage inflation and the economic growth , RBI uses certain tools like CASH RESERVE RATIO (CRR), STATUTORY LIQUIDITY RATIO (SLR), REPO RATE, REVERSE REPO RATE etc., Let us now try to understand more about these ratios.
RBI cuts Repo rate – What is Repo Rate?
When we need money, we take loans from banks, banks charge certain interest rate on these loans. This is called as cost of credit (the rate at which we borrow the money).
Similarly, when banks need money they approach RBI. The rate at which banks borrow money from the RBI by selling their surplus government securities to the central bank (RBI) is known as “Repo Rate.” Repo rate is short form of Repurchase Rate.
Example – If repo rate is 7% , and bank takes loan of Rs 1000 from RBI , they will pay interest of Rs 70 to RBI. (The current Repo-rate is 7.75% as of January 2015)
(Read: “What is CRR,SLR,Repo-rate and Reverse Repo-rate” to know more about these key rates)
So, higher the repo rate higher the cost of short-term money and vice verse. If the repo rate is low, banks have to pay lower interest amount on their borrowings. This in turn enable them charge lower interest rates on the loans taken by us. Lower repo rate can also strengthen positive momentum in the economy. These are the main reasons for markets turning ecstatic during last few days.
Currently crude oil (petrol/fuel) prices, commodity prices and inflation have eased and are at very comfortable levels. Against this backdrop, RATE CUT was imminent.
Impact of RBI Rate cuts
The below graphical illustration shows you about the impact of RBI’s rate cuts on Deposit Rates, Lending rates, Money supply in economy, economic growth and purchasing power of consumers.
Impact of RBI Rate cuts on Home Loans & lending rates
All most all banks & non-banking financial institutions have said that they are going to cut Lending rates immediately or in very near future (likely by March 2015).
State run lenders United Bank of India and Union Bank of India were the first to cut their Base Lending rate (the lowest lending rate) by 0.25% to 10%. State Bank of India has already cut its Deposit rates signaling (which will bring down its cost of funds) the downward trend of the home loan or lending interest rates.
Let us go through some more important points on ‘how the RBI’s rate cuts impact our Home Loans..’
- The RBI’s rate cuts does not necessarily mean that the borrowers benefit immediately. Your banker has to reduce its Base Lending rate. If your bank reduces the base rate then only you can see your Loan EMIs falling
- These rate cuts will not have any impact on Fixed rate home loans or Fixed rate consumer loans. The rate of interest is fixed with respect to fixed loans.
- The existing bank customers (who have taken loans) can see either their Loan tenures or EMIs coming down. By default the banks reduce the loan tenure instead of loan EMI. That means your monthly EMI installment amount remains the same. The rate cut will make a substantial difference if the remaining loan term/tenure is very long.
- If you want to get EMI reduced, you may have to contact your banker or lender to reset the term and conditions. Also, don’t forget to submit new ECS mandate for new EMI amount.
- If you have plans to acquire a property through a home loan, suggest you to wait for some more time. Home loan interest rates may moderate even more in this year (2015). You may see interest rates falling below 10%.
- As of now, do not be in a hurry to switch to a different lender or switch to different home loan plan with the same lender. I believe this is just the start of downtrend of the interest rate cycle.
- Your Home loan EMI has two components, the interest and principal. The interest component is bigger in the initial years, so a small change in the interest rate can have a huge impact. As the loan period progresses, the principal component will increase. So, when the principal becomes bigger, switching to a lower rate has minimal impact.
- You need to consider the loan outstanding, remaining loan tenure, interest differential and other charges before opting for a Home Loan Switch.
- If you have a fixed rate home loans over 13 per cent or so, it would make sense to switch to a floating rate loan.
- If you have not planned for your other Financial goals, it is better to opt for lower EMI and let the tenure remains same. The differential savings can be allotted/invested for your important financial goals. Kindly remember that the bank deposit rates will also come down. So, you have to choose your investment options prudently.
Impact of Rate cuts on Auto Loans & other loans
Unlike home loans – which generally have a floating rate – most auto loans carry a fixed rate. So, existing customers are unlikely to benefit from falling interest rates, but new buyers can benefit from lower rates over five/seven year tenure.
Many other types of loans like personal loans and small-ticket size loans for consumer durables (for bikes, LED TVs, etc.) will come down as banks start reducing base rates.
A 25 basis point rate cut during last week is the turning point in the interest rate cycle. This will surely have an impact on your other investment avenues (like equity, fixed deposits, debt mutual funds etc.,) as well.
RBI governor has cut Repo Rate only and has kept other key policy rates (CRR & SLR) unchanged. As the inflation softens (mostly YES) we can expect RBI to cut other key policy rates too. The rate cuts would put more money in the hands of consumers and help revive investment/the economy. But, the pace of future rate cuts will depend on many factors like inflation, crude oil prices, Rupee Vs Dollar, extent of fiscal deficit etc.,
Latest News (04-Oct-2019) : RBI cuts Repo Rate by 25 basis points to 5.15% from 5.4%. This is the fifth consecutive rate cut from RBI , after a rate cut in February, April, June & August of 2019. The repo rate now stands at 5.15 per cent, the lowest since March 2010. The reverse repo rate has been revised to 4.9%.
Latest update (07-Jun-2019) : The RBI cuts Repo Rate by 25 basis points to 5.75% from 6%. This is the third consecutive rate cut from RBI , after a rate cut in February & April of 2019. The reverse repo rate has also been reduced to 5.50 per cent from 5.75 per cent. The CRR has been kept unchanged at 4%.
Latest update (07-Feb-2019) : The RBI cuts Repo Rate by 25 basis points to 6.25% from 6.50%. The latest Reverse Repo rate has come down to 6%.
Latest update (02-Aug-2017) : RBI cuts Repo rate by 25 basis points. So, latest Repo rate is 6%. Reverse Repo rate has been cut by 0.25% to 5.75%.
Latest update (07-June-2017) : RBI keeps Repo rate unchanged at 6.25%, cuts SLR rate by 0.50% to 20% and also keeps Reverse repo rate and CRR unchanged at 6% & 4% respectively.
Latest News (06-April-2017) : RBI hikes Reverse repo rate by 0.25% to 6% and keeps other key rates unchanged.
Latest News (07-December-2016) : RBI keeps the key interest rates unchanged. The latest rates are : CRR @ 4%, Repo rate is @ 6.25% and Reverse repo rate is @ 5.75%.
Latest News (04-October-2016) : RBI cuts Repo Rate by 25 basis points to 6.25%.
Continue reading :
- What is CRR, SLR & Reverse Repo-Rate?
- What is MCLR? – Details, Components of MCLR & Review
- RBI’s latest data on Financial Savings & Liabilities of Indian Households (2016-17) | How & Where do we save & invest?
- Important Macro Economic Indicators you need to track as an Investor!
- What if the RBI hikes interest rates? | RBI’s Rate hike – Its Impact on the Economy & Personal Finances
( Image courtesy of Stuart Miles at FreeDigitalPhotos.net)
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I share/Fwd articles URLs to all my friends through whatsapp groups …I may miss to read newspaper some times due to heavy workload but will not miss to visit your blog 🙂
My query for today is ..,I have a home loan from HDFC and current ROI is 9.60 but it seems If I pay Conv.Fees around 5188 rupees , ROI Applicable would be 9.15% ,can you help me to get info why are they changing this fees?My principle outstanding amount is 18..22L Loan term Balance in months are 75..Is it good to pay this Conv.Fees and reduce EMI around 400 rupees or better to continue ?
Please read as “why are they charging this fees?”
Thank you so much for reading/sharing my blog posts 🙂
This fees is to switch from old lending rate system to MCLR based system. This switch is optional. If you wish to move to MCLR system, you can.
Kindly read: All about MCLR.
I have taken home loan on floating interest rate 10.15% in April 2015 (on 15 bps above BR 10%). Till Oct 2015 our home loan interest rate decrease as BASE RATE decrease by SBI and it reduced to 9.45% (on 15 bps above BR 9.30%) but since Oct 2015 SBI charging same interest rate till now. As per RBI guidelines SBI now providing loan on MCLR basis (current rate of interest is 25 bps above 1 year MCLR, ER 9.15%p.a.).
As my loan is on floating interest rate and since April 2016 many times RBI reduced its REPO rate but SBI not providing that benefit to me or say existing home loan account holders.
Kindly suggest what I should do in such a case and let us know whether it is advisable that we shift to MCLR basis loan (SBI is charging 0.50 % + applicable Service Tax of the outstanding for switch over).
How do fluctuations on Reverse Repo Rate affects interest rates on home loan?Please elaborate.
Reverse repo rate is the rate of interest offered by RBI, when banks deposit their surplus funds with the RBI for short periods. When banks have surplus funds but have no lending (or) investment options, they deposit such funds with RBI. Banks earn interest on such funds.
An increase in the reverse repo rate will decrease the money supply and vice-versa, other things remaining constant. An increase in reverse repo rate means that commercial banks will get more incentives to park their funds with the RBI, thereby decreasing the supply of money in the market.
A cut in Repo and Reverse Repo rates basically reduces the bank’s cost of borrowing from the RBI to add to its reserves. It enables banks to either increase the interest rate spread on loans made by the bank or offer borrowers lower rates of interest without eating into its own interest rate spread. Thus, a cut in Repo and Reverse Repo Rates increases the banking system’s potential by expanding more loans in a profitable manner.
The cut in repo / Reverse repo can be beneficial to the banking industry in short-term. Over medium to long term this leads to additional supply of money into the system thus fueling inflation rate.
The information provided is really helpful and also the way of presenting it is easy to understand
i take a home loan mahindra rural housing finance interest rate 15% floating, please confirm me current interest rates for non banking housing finance.
Dear Anil..But that is a very rate of interest right?
Nice article in that many information was there
Nice article and information. Thanks.
Need one more help from you. I have taken Rs. 37 Lac home loan from SBI during June 15 @9.90 floating for 20 years. After the latest rate cut, it had dropped to 9.35% (OD account website is updated with this). Now let me know how many EMIs reduce because of this rate cut. Or let me know how to calculate.
You can use MS-Excel functions to calculate ‘N’ (Tenure) or new EMI.
Suggest you to go through these articles;
Calculate Future Value of investments
Calculate total interest amount payable.
Thanks for useful information!
Is it wise to close the Home loan as early as possible?
I cannot see big difference in tax savings under section 24 when I compare the interest paying towards my 20lakh/20 years tenure. Under 80C I have 1.5 lakh savings in other products like PPF, insurance.
After reading financial blogs I feel its not worth going for Home loan only for Tax savings.
Pls correct me if i’m wrong
B R Nair
Dear Mr Nair,
Unfortunately there are many home buyers who buy property just to save some taxes. It is not a prudent thing.
Retirement planning and Kid’s education goals should be give more importance than buying a home through home loan.
If you have already taken a home loan, suggest you to keep it running, and allocate surplus monies or disposable income towards other important goals.
Kindly read my articles;
The 6 most common personal finance mistakes.
Kid’s education planning
kindly help to take
loan under this
scheme. But I don’t
know how to apply,
Banks will never reduce floating interest rates even if RBI reduces base rates , because it is not mandatory for banks to follow RBI. In fact I feel RBI is just a dummy piece. For instance as far as I know , even with the recent reduction in base rates by RBI , many banks have not even budged their interest rates.
I enquired the same with the banking Ombudsman and they told the same thing. Banks have the final say in deciding their interest rates , not RBI. Only thing is banks can not lower their interest rates than the base rate , now which bank would ever do that ?
Yes, agree with your views. Banks do not pass the lower rate benefits to its customers immediately..they take time..
Hi, I have taken 22L housing loan @floating rate of 10.95% for 20yrs. I contacted the bank to reduce my EMI/Tenure, as RBI has decreased the repo rate. Got reply saying I have to pay an amount of Rs11,048/- to reduce the current rate of interest from 10.95% to 10.45%. Can you please give you comments on this. As I am not clear, why should I pay that amount, since my loan is of type floating.
Hello Sreekanth, I would like to start stock trading. Ive saving bank accounts in Axis bank and Sbi. What would be your advise on as to which bank should I opt for doing trading? Do these banks support mobile apps?
What is a good platform to invest around Rs. 1 lakh?
Do you mean by short term stock trading?
I am against stock trading 🙂
Suggest you to invest in Mutual funds or stocks for long term wealth creation. Short-term trading can be dangerous.
I am planning to buy a second hand flat around 55L (+ registration) on may-2015. I have cash around 40Lacs at hand. Should i use the full amount from hand and rest is from home loan OR should i take a part of amount from hand ? Please also mention the better tenure period for the loan.
fyi – this is my first property.
Is this property going to be your ‘self-occupied’ one?
What are your other financial goals?
my own use. I want to put some amount in MF for 10 years. please suggest me a nice advice with investment options.
kindly read below articles;
Top Equity Funds
Top ELSS funds
Top Balanced funds
How to create a solid INVESTMENT PLAN?
I just want to know that if the rate of reverse repo rate cut by the RBI than will we get any benifit
A cut in reverse repo rate means, banks can afford to provide loans at lower rate of interest to their customers. The EMIs (Equated Monthly Installments) may come down.
Its good the rates came down, but my home loan banker is asking for a rate change adjustment amount, to reduce the interest rate. i.e. the difference in interest rate on the outstanding balance of the loan.
Is it necessary to pay the charges, to get the interest rate down?
These charges are generally called as ‘conversion fees’ or ‘switching charges’, which is quite common. How much percentage points are they asking for?
I have taken Housing loan from HDFC Bank around 1 year ago at 10.25% floating rate for 15 years. Currently I’m paying EMI of Rs. 7,630/-. I just wanted to know how this reduced Repo rate will be advantageous to my housing loan.What are available options for conversion.
When RBI cuts Repo rates (or) Key policy rates, banks will generally (may not be immediately) cut the lending rates too.
To meet statutory requirements (like CRR/SLR ) banks have to keep certain reserves with RBI, so when percentage of reserves that banks have to keep with RBI comes down, banks may have more monies to do business, this may lead to lower loan rates.
Same way, banks borrow money from RBI by paying interest rate, when RBI reduces this interest rate (payable by banks to RBI), banks will have to pay lesser interest amount on their borrowings. So, banks will generally pass on this benefit to its customers by reducing the interest rates on loans.
thanks for your guidance on home loan and repo rate. The purpose to visit this site is I wanted to know, “how repo rate impact my home loan?”
Just wanted morr guidance from you. I have taken home loan from LICHFL 2 years ago on 10.25% interest rate. Will this repo rate fluctuations impact my home loan or not. And what I have to do to increase my principle amount?
Yes, repo rate cuts do impact all types of loans. But, banks may take time to pass on the benefits to its customers. Why do you want to increase your principal amount? I did not get that..
Very good article.
I have taken home loan from HDFC Bank. Its floating home loan. But, still my Interest Rate has not fallen. When I contacted the Bank, they said I have to apply to do so. And they will charge .25% fees to reduce the Home Loan.
Do they charge fees for reducing the Interest Rates? Please advise.
Thanks & Regards,
As mentioned in the article, though RBI cuts key policy rates, banks may not immediately pass the benefits to its customers. I believe that sooner or latter the home loan interest rates will come down.
Ask your banker, what exactly is that fee related to?
Are they talking about processing fees?
yes, even I was asked to pay a fee to get this ROI/tenure reduced. But I am not sure what his fee is for.
This fee can be for ‘switching’ or ‘conversion’. What is the outstanding loan amount & remaining loan tenure ?
Thanks a lot, good information, my loan processing now probably ill get emi from 10th march 2015,
should i stop processing till end of march, will they accept my stop process request??
Else if i opt floating rate, will it be useful??
kindly suggest me☺
Low interest rates are always good right?
Home Loan interest rates may come down in the next Financial Year, rates can be below 10% levels.
You could have opted for Floating rate loan. Check with your home loan company if it is possible to convert the application to a floating rate one.
Thanks! ill let u know after discuss with my loan provider.
Thanks a lots for this useful information
Thank you and keep visiting!