News Analysis

RBI policy: Further relief for borrowers as rates move lower

Keerthi Sanagasetti | Updated on October 04, 2019 Published on October 04, 2019

Depositors may want to lock in at current rates before banks revise their rates to factor in the cumulative cuts in RBI’s repo rate. Photo: Reuters   -  Reuters

The RBI’s move to mandate the linking of floating rate loans to an external benchmark starting October 1, was well timed

BL Research Bureau

Loans will get cheaper while depositors will have to look for other options. Bond yields remained flat given the Reserve Bank of India’s acceptance of economic slowdown.

The Monetary Policy Committee (MPC) unanimously cut the repo rate by 25 basis points to 5.15 per cent. This translates to a cumulative cut of 135 bps in CY19. That said, banks have transferred only 30-40 bps cut in their lending rates while the transfer in deposit rates was much faster. After the monetary policy in August, SBI had cut its deposit rates thrice by 25-75 bps cumulatively.

The RBI’s move to mandate the linking of floating rate loans to an external benchmark starting October 1, was well timed.

Though the RBI has mandated a minimum three-month reset for these repo rate-linked loans, an additional cut of 25 bps done on October 4, 2019 would immediately reflect on the interest rates of the new loans. This contrasts with the older MCLR regime where borrowers would have to wait for banks to revise their MCLR. Hence, loans could get cheaper for new borrowers.

Read: RBI cuts repo rate by 25 bps to 5.15%

Depositors

Recently several major banks announced multiple cuts in their deposit rates. With the cumulative cut in repo rate being much higher in CY19, there is more room for banks to cut deposit rates. This has only worsened with today’s repo rate cut of 25bps.

Hence, depositors may want to lock in at current rates before banks revise their rates to factor in the cumulative cuts in RBI’s repo rate. Other alternatives would be investing in post office savings schemes and small savings schemes which continue to offer higher returns.

Investors with higher risk appetite can invest in the fixed deposits of NBFCs where the interest rates are higher than in banks by up to 300bps, compensating the higher risks and lack of deposit insurance.

Also read: RBI raises lending capacities of MFIs

Bond market

While the RBI remained silent on its OMO purchases, the bond markets were satisfied with a more pragmatic view on growth outlook. While most cabinet ministers seemed too optimistic of the state of the economy, the RBI officially agreed to the near-term outlook being “fraught with risks”. Adding to that the MPC also cut the GDP forecast for FY20 to 6.1 per cent from 6.9 per cent earlier.

The MPC, having reiterated the Centre’s challenge in FY20 ― to stick to budgeted spending and revenue targets ― bond markets haven’t reacted much, since most of the anticipated fiscal pressure was already priced in post the corporate tax cut announcements.

Published on October 04, 2019
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