The Monetary Policy Committee of the Reserve Bank of India is currently having its first meeting for the fiscal year 2019-20 and the monetary policy announcement will happen tomorrow. It is widely being expected that the committee will recommend another rate cut of 25 bps. In February too, the RBI had cut its repo rate by 25 bps to bring it down to 6.25% from 6.50% earlier.
The expectation of a rate cut is based on a lower inflation rate as well as slower growth in the economy. The consumer price index-based inflation has remained within the RBI’s 4% target for over 6 months and is further expected to remain within the target range at least for the next few months. “In addition, subdued domestic economic growth could also prompt the RBI to lower its interest rates," Care Ratings said in a recent report.
Consequently, the Indian economy is expected to witness a stable to lower interest rate cycle. “Looking ahead, global and local factors will guide future policy action. Consumption has slowed down a bit and the investment cycle is still slow. So a softer interest rate regime will help in boosting both. It is likely that there could be another 25 bps rate cut later in the year but that would be dependent on inflation and growth data. In addition, the central bank will keep an eye on the post-elections budget, monsoons and oil prices," said Shanti Ekambaram, president – Consumer Banking, Kotak Mahindra Bank Ltd.
As a retail consumer, a falling rate impacts you in two different ways. If you are a depositor, the new deposits you make earn a lower rate and it means lower returns. However, as a borrower, a downward revision of interest rate would bring down your interest outgo in the near future. For instance, for floating rate home loans, a new rate becomes effective on your reset date. So, if someone has a home loan based on 1-year MCLR and reset date in January, she would see an impact in her interest rates only in January next year, Even if there is an immediate reduction in MCLR, although marginal, by the respective bank in response to the repo rate reduction.
The transmission of the rates from banks to borrowers would be different across banks. Though any reduction in rate helps you as a borrower of big-ticket loans like home loans, you should not hurry towards switching a loan to another lender for a difference less than 50 bps, as it does not make a meaningful impact over the tenure of the loan.
Moreover, it is yet to be seen how the external benchmarking of retail loans firms up. The RBI had earlier said that all new retail loans from 1 April will be benchmarked against an external benchmark like the repo rate or treasury bills yields. However, the final guidelines have not been issued yet. Meanwhile, State Bank of India has announced linking its savings deposits of over ₹1 lakh directly with the repo rate from 1 May.
