How RBI’s latest policy announcements could impact your loans and investments

The Reserve Bank of India maintained the status quo on widely expected lines in its bi-monthly monetary policy review meeting on Friday as it set out to provide fiscal solutions amid the intense second wave of the Covid-19 pandemic inflicting pain on the Indian economy. The central bank decided to keep the repo rate and the reverse repo rate unchanged at 4% and 3.35%, respectively. This means the key policy rate will continue to remain at the multi-decade low of 4% for over a year now.

Let’s try to understand how this could impact your personal finances.

1. Impact on home loan borrowers

The recent announcement ensures that repo-linked home loans, introduced in October 2019 under the RBI’s externally benchmarked loan mandate to transparently pass on rate cut benefits to borrowers, are unlikely to see any interest rate hikes in the short term. In fact, as many as 15 banks are currently 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 over 750-800 subject to other terms and conditions. So, if you’ve been planning to take a home loan and have a stellar credit score, you’ve got at least a few more months to enjoy the lowest available interest rates.

If you have the necessary liquidity, income stability, and the capacity to get through ongoing economic challenges and uncertainties, this may be a good time for you to buy a home. Also, keep in mind that these repo-linked loans would see a quick and proportional increase in interest rates translating to higher EMIs whenever the RBI decides to hike the repo rate.

If you’ve been servicing a home loan under the previous benchmark regimes like BLR, BR or MCLR, the latest announcement could lead to a slight reduction in your home loan interest rates in the next few months if it hasn’t already. MCLR loan interest rates, for example, are usually reset once in six months. However, if you feel the difference between the interest rate applicable to you and the rates offered under the repo-linked regime by your lender is high – for example, more than 50 basis points — you could refinance the loan.

You could do this either with your own lender by paying a processing fee or transferring your loan to another lender offering you better terms. A refinance to a cheaper benchmark helps especially if you have more than half your loan tenure left. Taking the second route would include more paperwork, but switching to a repo-linked loan could lead to not just EMI reduction but also major savings in total interest obligation that could help you become debt-free much faster.

2. Impact on new car loan borrowers

Although car loan interest rates are not externally benchmarked like the new home loans and usually follow a fixed-rate regime throughout the loan tenure (available up to 84 months in most cases), most banks have reduced their new car loan interest rates in the last few years amid a low repo rate regime. Here’s a comparative table of the lowest advertised new car loans interest rates offered by a few leading banks in May 2019 versus May 2021:

Comparative data taken from respective bank websites on *29 May 2019 and **13 May 2021.

As such, if you’re planning to take a new car loan, you might want to finalise your decision in the near future so that you can enjoy the lower fixed rates throughout the loan tenure. If you’re already servicing a car loan at a higher rate, you can consider transferring your loan to another lender offering lower rates if doing so allows you to save considerably on balance interest dues after factoring in the loan foreclosure charges.

3. Impact on fixed deposit investors

The central bank’s decision to keep the repo rate unchanged for over a year now has also contributed towards lowering FD interest rates – something that has impacted countless risk-averse investors like senior citizens who often rely on their FD returns even for their day-to-day expenses. Today’s MPR announcement would mean these low FD rates will continue for the time being. And since FD returns are fully taxable according to the investor’s applicable slab rate further reducing the real returns, they need to make some smart adjustments in their investment strategy if required to timely fulfil their financial goals.

Most banks 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. However, there are still a few private and small finance banks that are offering higher rates up to 7.25% p.a. Investors could consider investing a portion of their funds in FDs of these banks after a thorough risk assessment and if doing so is in line with their returns expectations and risk tolerance. They could also consider investing in other investment products across various asset classes like top-rated equity and debt funds and certain small savings schemes like PPF, SSY, SCSS, etc. in line with their risk appetite and liquidity requirements to earn higher overall returns while keeping the risk under control. Investors should not hesitate in consulting a certified investment advisor if they are unable to plan their investments on their own.

(The author is CEO, BankBazaar.com)