What is the impact of RBI’s rate cut on home loan?

Home loans become cheaper after the RBI cut in repo rate, a move that compel most banks to soften lending rates.

Created On: Oct 1, 2015 16:55 IST

In a big boost to the Indian economy and borrowers, the Central Bank of India on September 29 cut interest rate by 0.50 per cent. In its monetary policy review, RBI reduced the repo rate from 7.25 per cent to 6.75 per cent with immediate effect.  Consequently, the reverse repo rate adjusted to 5.75 per cent, and the marginal standing facility (MSF) rate and the Bank Rate to 7.75 per cent
Home loans will soon become cheaper after the RBI cut these interest rates -- a move that will compel most banks to soften lending rates.  Major lenders like, SBI, ICICI bank and Axis Bank slashed their base rates after the RBI policy announcement. 

Here the banking team of Jagran josh is providing the meaning of repo rate and explain how it impacted the home loan borrower.

What is repo rate?

This is the rate at which commercial banks borrow money from the central bank for a short period of time by selling their securities or financial assets to the central bank with an agreement to repurchase it at a future date at predetermined price. This rate is also known as Repurchase agreement. The repo rate is used by the central bank to increase liquidity in the system.

In other words, Repo rate is used by RBI to control inflation. In the event of inflation, RBI increase repo rate as this acts as a disincentive for banks to borrow from the central bank. This ultimately reduces the money supply in the economy and thus helps in arresting inflation. The central bank takes the contrary position in the event of a fall in inflationary pressures.

Impact of the rate cut on home loan borrowers: This is the fourth rate cut by RBI since January largely aided by low inflation rates signalling a definitive change in RBI’s stance from steadfast focus on controlling prices to hand-holding growth.

  • A lower repo will bring down banks’ borrowing costs, which in turn, may prompt them to slash their “base rates”, the floor interest rate on which lending rates for final home, auto and corporate borrowers are fixed.  
  • The repo rate cut will push companies to invest, add capacities, hire more, and prompt people to spend on houses, cars and other goods, which mostly peak during the festival season during October-December. 
  • The rate cut will help both the new and existing loan borrowers. The new customers will enjoy the benefit of rate cut as the banks will pass on the rate cut benefit to them anyway.
  • For existing customers, if the bank had initially raised tenure when the rates were going up, the customer will first see the reduction in tenure and then later when the rates will go down, there will be a cut in the EMIs.  However, for existing customers the benefits will not be in the same proportion as the new customers.

As a major impact, State Bank of India, the country's largest commercial bank, lowered its base lending rate by 40 bps to 9.3 percent.

Note: Base rate is the minimum rate set by the RBI below which banks are not allowed to lend to its customers. Base rate is decided in order to enhance transparency in the credit market and ensure that banks pass on the lower cost of fund to their customers.

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