New RBI to impact your loans and investments
The Reserve Bank of India(RBI) has maintained its current situation on widely expected lines in its latest bi-monthly monetary policy review meeting on Friday. It set out to provide financial solutions amid the intense second wave of the Covid-19 pandemic inflicting pain on the Indian economy. The Central bank (RBI) has kept the repo rate constant at 4% and the reverse repo rate at 3.35%. This means the essential policy rate will continue to remain at the multi-decade low of 4% for over a year now.
Let’s try to figure out how the RBI policy can impact your finances.
Home loan borrowers
The recent pronouncement confirms that repo-linked home loans, which was introduced in October 2019 under the RBI’s externally benchmarked loan mandate to pass on rate cut benefits to borrowers transparently, are unexpected to see any interest rate hikes in the short term.
15 banks are offering these repo-linked floating home loans starting at under 7% p.a. with the lowest rates usually reserved for eligible borrowers with credit scores between 750-800 and liable to other terms and conditions. So, if you have been planning to take a home loan and have an exceptional credit score, you’ve got at least a few more months to relish the lowest available interest rates.
Suppose you have the required liquidity, income stability, and the capacity to go through current economic challenges and uncertainties. In that case, this may be a good time for you to buy a home. But keep in mind that these repo-linked loans would see a quick and proportional increase in interest rates which means higher EMIs whenever the RBI decides to hike the repo rate.
If your ongoing home loans are under the previous benchmark regimes like MCLR, BLR, BR, then the latest announcement could lead to a slight reduction in your home loan interest rates in the upcoming few months if it hasn’t already. (MCLR) Marginal Cost of Funds based Lending Rate loan interest rates is usually changed once in six months by the RBI. If you feel the difference between the interest rate applicable to you and the rates offered under your lender’s repo-linked regime is higher, you can refinance the loan.
You can do this with your lender by paying a processing fee or transferring your loan to another lender that offers you better terms. A refinance to a cheaper benchmark can be helpful if you have more than half your loan tenure left. Taking the second route includes more paperwork, but switching to a repo-linked loan could lead to EMI reduction as well as significant savings in total interest obligation that could help you become debt-free much faster.
New car loan borrowers
Car loan interest rates are not benchmarked like the new home loans, and usually, they follow a fixed-rate regime throughout the loan tenure. Most lenders have reduced their new car loan interest rates in the middle of a low repo rate in the last few years. Here is a comparative table of the lowest new car loans interest rates offered by a few superior banks in May 2019 vs May 2021:
If you have any plans of taking a new car loan, you can finalise your decision in the near future so that you can relish lower fixed rates throughout the loan tenure. Suppose you already have a car loan at a higher rate. In that case, you can consider transferring your loan to another backer offering lower rates if doing so allows you to save a considerable amount on balance interest dues after including loan foreclosure charges.
Fixed deposit investors
The RBI’s latest decision to keep the repo rate constant for over a year now has also contributed to lowering fixed deposit (FD) interest rates, affecting countless risk-averse investors like senior citizens who rely on their FD returns for every regular expense. Today’s MPR announcement by RBI means that these low FD rates will continue for the time being. Since FD returns are fully taxable according to the investor’s applicable slab rate, further reducing the real returns, if required, they need to make some sharp adjustments in their investment strategy to fulfil their financial goals.
Most Lenders are currently offering interest rates in the range of 4.25% to 5.75% p.a. for non-senior citizen FDs in tenures up to 5 years, amounting to less than Rs.1 crore. There are still few private and small finance banks that are offering higher rates up to 7.25% p.a. Investors can consider investing a small portion of their funds in FDs of these banks after an in-depth risk assessment and if doing so is in check with their returns expectations and risk tolerance.
They can also think about investing in other investment products across various asset classes like top-rated equity and debt funds and specific small savings schemes like PPF, SSY, SCSS, etc., in check with their risk appetite and liquidity requirements to earn a sizeable overall return while keeping the risk self-controlled. Investors should consider consulting a certified investment advisor if they are unable to plan their investments on their own.