The RBI, earlier this month, reduced its repo rate by 25 BPS. The aim of the cut is to encourage and increase investment. The move was anticipated by many as inflation in the retail market grew by only 2.2% in December of 2018; this is the slowest rate of increase in the last 18 months. Also, it is keeping with the Monetary Policy released in December, 2018 that pitched a ‘neutral’ stance instead of its previously existing ‘calibrated tightening ‘stance. The reduction means that the RBI’s repo rate now stands at 6.25%.
However, will the move result in lower home loan interest rates?
Banks and lender borrow money from RBI. They need to repay the amount borrowed with interest to the Central Bank. This interest rate is known as repo rate. Therefore, usually when the repo rates decrease, lenders decrease the interest of their home loans. However, the reduction in the repo rate has not made much of a difference on the rates offered by housing finance companies and banks.
Only one bank has reduced its rates.
In response to the RBI’s reduced repo rate, only the SBI has reduced its home loan interest rates. And being the bank with the largest market share for home loans, this was expected. However, the bank’s reduced rates are being seen as symbolic as the new rates are a mere 5 basis points lower than previous rates. Since 1 basis point is equal to 0.01%, the SBI’s new rates will be just 0.05% less than they were. This means that home loans up to Rs. 30 lakh will come at 8.70% instead of the previous 8.75%.
Why have the rates not decreased further?
This is mostly due to deposit rates staying stagnant. Deposit rates play a pivotal role in the dynamics of interest rates under the MCLR (marginal-cost-based lending rate). Difficult liquidity & year-end pressures have made it challenging for banks & lenders to lower their deposit rates. The top management of one public sector bank was quoted saying “Mathematically, there seems to be no room available for rate cut since the March MCLR remained almost flat as compared to last months”.
Will home loan interest rates drop in the future?
A reduced repo rate will lower borrowing cost and this should bring down deposit rates. However, even a deposit rate cut also comes with minimum buffer of three or four months. In short, there are a number of things at play and that’s why, following the decision from the RBI to lower its repo rate, most banks are expected to have meetings to discuss interest rates & deposit rates. So, even if RBI’s move is to have any positive effect on home loans, end consumers will have to wait for a while to see the benefits.
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