This Time, Repo Rate Cut Should Make You Really Happy. Here Is Why
In its Third Bi-Monthly Monetary Policy Review on August 2, the Reserve Bank of India (RBI) reduced repo rate— the rate at which the Central bank lends to financial institutions — by 25 basis points (bps), to bring it down at six per cent, the lowest since November 2010. Since April 2015, repo rate has been slashed by 150 bps while banks have also cut the MCLR (marginal cost of funds-based lending rates) by 75-250 bps.
This certainly is good news for India’s real estate. Legislations such as the Real Estate Act and the Goods and Services Tax have already done their bit to bring positivity back among consumers; a fall in lending rate would further boost homebuyers’ confidence. As DLF Chief Executive Officer Rajeev Talwar put it, the move “could not have come at a more appropriate time”.
However, we all know you may have to wait a little longer till banks pass on the benefit and reduce the lending rates. Has it not been a recurring practice by financial institutions to wait for a stern directive from the Central bank to oblige borrowers? After reducing key policy rates, the RBI will invariably have to nudge banks to pass on the benefits of the cut to borrowers. The Central bank feels not enough is being done for the borrowers’ benefit.
“Though the marginal cost of funds-based lending rate (MCLR) system is an improvement over the base rate system, monetary transmission by banks has not been entirely satisfactory,” the RBI said in a statement on developmental and regulatory policies.
To address this, the Central bank had set up an internal group so that consumers are able to enjoy due benefits of favourable policy changes. Recently, the panel recommended that banks should link their home loan rates to the RBI’s repo rate. It also suggested that the reset period be kept at one month. Currently, banks follow a reset period of one year. The RBI is yet to accept the recommendation.
MCLR versus base rate
While the MCLR system, which is more responsive to changes in rates than the earlier base rate system, was introduced in April last year to ensure better transmission, a large part of existing borrowers have their loans linked with the old system. To ensure borrowers who have their loans linked to the base rate system, the RBI plans to link the system to the changes in the cost of funds for banks. While the panel is likely to give it report by September 24, the RBI’s six-member Monetary Policy Committee (MPC) will meet on October 2 for the next review.
While experts are of the belief that the next cut in rates can only be announced in the fourth quarter of the financial year 2017-18, things are going to improve for homebuyers much before that.
However, do note that as it stands today only new borrowers will be able to reap the benefits of the reduction in rate in its entirety. Existing borrowers who have their loans linked with the MCLR system will have to wait till the reset period to avail of the benefits. Also, these borrowers will see their loan tenure shortening, not a decreased EMI (equated monthly installment) outgo.
In case your loan is linked with the base rate, you may consider switching to the new lending benchmark within your banks. By paying of a nominal charge, you may be able to reduce the cost of your loans that will amount to savings in six figures.
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