Loan EMIs likely to fall as RBI cuts repo rate

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The RBI cutting the repo rate today is good news for borrowers as EMIs are likely to go down for retail borrowers presuming that banks pass on the benefit of this cut. The Reserve Bank of India Thursday cut its repo rate, or the rate at which it lends to banks, by 25 basis points to 6 per cent — the second consecutive rate cut under new RBI governor Shaktikanta Das. The monetary policy committee of the RBI also decided to maintain the neutral monetary policy stance. The panel voted 4-2 in favor of the rate cut.

Post the announcement, the repo rate stands at 6 percent down from 6.25 per cent earlier and reserve repo rate at 5.75 per cent as compared to 6 per cent earlier.

In this calendar year, RBI, has cut the repo rate by 50 bps in total.

Banks may be able to pass on the RBI’s rate cut to borrowers only to a limited extent, say analysts. Banks had only reduced their lending rates by under 10 basis points after the RBI’s last 25 bps cut in February. Deposit growth has come down sharply and banks are competing with another to attract depositors. Lower rates mean less deposit mobilization

With the apex bank lowering the key policy rates, it is likely that banks will follow suit. RBI in its Statement on Development and Regulatory Policies dated December 6, 2018, had asked banks to start using external benchmarks while disbursing new floating rate personal or retail (i.e. housing, auto etc.) with effect from April 1, 2019. However, in its policy announcement today, the central bank said it has deferred this move for the time being.

Recently, the country’s largest bank, State Bank of India (SBI) announced its plan of linking interest rate on savings account and short term loans to the repo rate. As per the new rules which will come into effect from May 1, 2019 savings account having balances of above Rs 1 lakh and all cash credit accounts, overdrafts and short term loans above Rs 1 lakh will be linked to repo rate

The savings account will earn an interest of 2.75 per cent less than repo rate (Repo rate minus 2.75 percent) whereas cash credit accounts and overdrafts will carry an interest rate equal to the repo rate plus spread of 2.25 percent (Repo rate plus 2.25 percent).

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