With the six-member monetary policy committee (MPC) headed by RBI Governor Shaktikanta Das, voting to reduce the repo rate by 25 basis points (bps) to 5.75 per cent on Thursday, the rate-sensitive real estate and auto sector are likely to get a major boost. This is the third consequent rate cut. Repo rate is the interest rate at which the RBI lends money to banks. When the cost of borrowing goes down for banks, they can choose to lower their respective marginal cost of funds based lending rate (MCLR), which is the minimum interest rate that a bank will charge on the loan and directly impacts your EMIs.
Hence, the rate cut today, coupled with the MPC’s decision to change the policy stance to accommodative, means that those shopping around for home loans, car loans et al may land a cheaper deal soon.
For instance, consider a Rs 25 lakh home loan for a 10-year tenure. The current interest rate offered by SBI is in the 8.55-8.75 per cent range. This translates into an EMI of about Rs 31,332 at the highest interest rate. If the full benefit of the repo rate cut is passed on and the new interest rate comes down to 8.5 per cent, the EMI outgo will come down to around Rs 30,996. That may not seem like much but the total reduction in your interest payable is over Rs 40,200. Moreover, the bigger the loan amount, the higher the benefit for home loan takers.
The latest monetary policy will therefore give a breather to the battered real estate sector, which continues to grapple with a liquidity crisis along with issues like delayed housing projects and piling up inventory.
Similarly, the EMI on a Rs 10 lakh car loan for 7 years will come down from Rs 16,089 to Rs 15,962 if the interest rate comes down from 9 per cent to 8.75 per cent.
Unfortunately, with the RBI deferring the decision to link all new floating rate personal or retail loans (housing, auto, etc.) to external benchmarks like the repo rate, you may not benefit much from the rate cut today. In the February and April monetary policies the MPC had slashed the repo rate by a total of 50 bps, but very little trickled down. For instance, the State Bank of India, the country’s largest lender by assets, had reportedly cut its key lending rate by only 10 basis points in response.
Also, existing home loan customers may have to wait awhile to see an impact on their EMIs because of the reset date factor. The interest rate of the loan for the borrower is changed only on the reset period, which is typically 1 year.” So your loan rate will go down only after twelve months even if your bank reduces the MCLR rate today.