On April 4, 2019, the Reserve Bank of India cut the repo rate by 25 basis points effective immediately. The decision came after a 6-member Monetary Policy Committee (MPC) met for the bi-monthly monetary policy meeting, headed by the RBI governor. It comes just a month after the RBI cut the repo rate by another 25 basis points in February, taking the total rate cut to 50 points this calendar year.
Currently, the repo rate stands at 6%, down from 6.5% at the beginning of 2019. The reverse repo rate has also come down to 5.75%. With the RBI lowering its rate, most of the other public financial institutions also followed suit and reduced their interest rates on home loan and other loans with floating interest rates. It indicates that you have to pay lesser EMIs on your home loan due to the rate cut.
Understanding Repo Rate And Its Effects On Your Loan EMI
The repo rate is the interest rate at which the RBI lends money to financial institutions. It is a tool used by the RBI to control the amount of money in circulation. For example, if the inflation is high, RBI increases the repo rate, which discourages financial institutions from borrowing, as a result of which the cash in circulation goes down, thereby arresting inflation.
When the RBI reduces this repo rate, financial institutions can borrow money at a lower interest rate. They usually pass this benefit on to the consumer, encouraging them to avail more loans. For example, most financial institutions reduced their home loan interest rates by 0.10%-0.25% following the RBI declaration. You may calculate the reduction in the EMIs with a loan EMI calculator.
However, the reduction is not always proportional or uniform. Some lenders may reduce their interest rates more than others. As a consumer, you may not always benefit from a reduction in the repo rate. There are three primary reasons behind that.
- Financial institutions fix their home loan interest rates based on the Marginal Cost of fund based Lending Rate or MCLR. It is the lowest interest rate below which a financial institution cannot lend money to any individual. This methodology was introduced in 2016 by the RBI, and it replaced the Benchmark Prime Lending Rate (BPLR). MCLR, while being correlated to the repo rate, is a separate entity altogether and a lot of other factors such as operating cost and cost of deposits are considered while calculating it. It may not always reduce at the same pace as the repo rate.
- Your loan may be a fixed rate home loan, in which case there will be no change in your home loan interest rates regardless of any reduction in repo rate.
- Even for floating interest rate loans, there is a reset date for interest changes. It typically happens once a year, and you have to wait for your reset date before any change occurs.
Nevertheless, financial institutions are the first to pass on the benefits of a rate cut to their customers. Some of them offer Home Loans with floating interest rates against an easy-to-meet home loan eligibility criteria and minimal documentation.
Before availing a home loan, understand these fundamental principles of how to predict interest rate cuts via the repo rate and MCLR changes. Pay a lower cost of loan over time.