Your loan EMI likely to come down as RBI cuts Repo rate by 25 bps

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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 (RBI) has, in its bi-monthly monetary policy review today, cut the key policy rates by 25 basis points (bps). (One basis point is equal to one hundredth part of percentage.) Post the announcement, the repo rate stands at 6 per centdown from 6.25 per cent earlier and reverse repo rate at 5.75 per cent as compared to 6 per cent earlier. This is second consecutive time the central bank has cut the repo rate in this calendar year. In the last monetary policy review on February 7, RBI cut the repo rate by 25 bps. In this calendar year, RBI, has cut the repo rate by 50 bps in total. 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. Naveen Kukreja, CEO& Co-founder, Paisabazaar.com says, “25 bps cut in repo rate will encourage banks to reduce their home loan interest rates. However, the quantum of reduction in their lending rates will also depend on their cost of deposits, operating costs, etc as these are also factored in while calculating their MCLR. Hence, any upward pressure on these factors may lower the transmission of repo rate cut to existing and new home loan borrowers.” 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). Impact of the rate cut Assuming that banks also pass on today’s reduction in repo rate by RBI here is an example of how your home loan EMI is likely to be impacted:

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