EMI on your home loan will not go down rapidly in spite of RBI rate cut

The Reserve Bank of India (RBI) has lowered rates of interest for the fourth successive time in the country. The repo rate has now been slashed by 35 basis points and is at the lowest threshold ever since April in the year 2010 at 5.4%. The RBI has thus lowered rates of interest by a whopping 110 basis points ever since the beginning of 2019. The substantial cut in rates is notably a push to Indian banks to reduce their lending rates more prior to the beginning of the festive season in 2019.

This should be a welcome development for home loan borrowers although it should be kept in mind that banks have not transmitted the rate cuts swiftly to their customers. In the present duration, banks have on an average, lowered the weighted average lending rates to the tune of just 29 basis points as compared to the RBI cutting rates by 75 basis points in comparison.

State Bank of India (SBI) recently lowered its MCLR (marginal cost of funds based lending rate) by around 5 basis points for various tenors while the MCLR was lowered by 10 basis points for HDFC Bank. HDFC also slashed its lending rates by 10 basis points for existing and new customers alike. SBI also reduced its MCLR by an additional 15 basis points post the announcement of the latest repo rate cut by the RBI.

Any further reductions will be dependent on SBI’s desire to pass on the lower rate benefits to borrowers. In this context, the Founder & CEO at Square Yards and Square Capital, Tanuj Shori, has opined that previously, in spite of cuts in rates like the ones we are experiencing today, the rate of interest on home loans remained on the sticky side since deposit rates remained at higher levels for banks.

Going by this, customers should not expect their home loan EMIs to reduce swiftly in the present scenario. Existing home loan customers will witness a drop in the EMI amount only when the MCLR of their banks are lowered. The success of the new RBI policy will be dependent on transmitting lower rates to borrowers where banks have a huge role to play as per market experts. However, a cascading of the advantages of a reduced base rate may be seen over some months according to them.

The cut in rates courtesy the apex bank may lead to deposit rates coming downwards and rates may reduce for small savings schemes as well. Banks have already reduced interest rates for FDs in the recent past. SBI has cut rates to the tune of 50-75 basis points for deposits with shorter tenors and those with longer tenors have seen a rate cut of 20 basis points. The rates of deposits are expected to inch downwards even in the near future as per the Head-Treasury for Lakshmi Vilas Bank, R.K. Gurumurthy. Transmission is expected to witness a major improvement in the near future according to him.

Rates of interest have been lowered by 10 basis points for small savings schemes courtesy the Indian Government for July-September, 2019. The rates are tied to yields on 10-year Government bonds and undergo revision on a quarterly basis. With this yield somewhat coming on the softer side over the last few weeks, rates of interest may be cut even further on small savings schemes for Investors in the October-December period.