RBI Policy Meeting: RBI Repo Rate Remains Unchanged: What FD Investors and Home Loan Borrowers Can Do Now
The repo rate and the reverse rate remain at 4% and 3.35% respectively after the announcement. No change in the repo rate was expected, as the central bank is expected to control government bond yields due to increased borrowing expected by the government in FY 2021-22.
With the repo rate at the lowest level seen over the past two decades, keeping this low interest rate regime works well for borrowers. “Interest rates on home loans in India have been the lowest over the past two years, resulting in a significant upturn in transactions in all categories of housing – affordable, mid-size and luxury. As apex bank has kept rates unchanged, we expect housing demand to continue on its upward trajectory in 2021, and the broadly positive economic indicators will further help homebuyers to close and finalize, ”said Ankush Kaul, President (Sales and Marketing) – Ambiance Grouper.
However, for FD investors, this will only increase their woes. Here’s what FD investors and borrowers can do after today’s announcement.
A ray of hope for debt investors
After continuously reducing interest rates, some banks began to increase longer-term DF rates. For example, in December 2020, Canara Bank increased the interest rate on FDs with terms of 2 to 10 years. With effect from January 8, 2021, SBI increased the interest of FDs with a duration of more than one year but less than two years. The SBI has not cut the FD interest rate since September 2020. This is after the RBI kept its key rates unchanged since its bi-monthly monetary policy of August 2020.
“We expect 10-year yields to rise slightly, possibly trading in the 6.2-6.25% range in the near term, as there are concerns about stubborn core inflation, a resurgence of COVID infections, new localized lockdowns and relatively higher sovereign yields in the United States, “said Amar Ambani, senior president and head of research – Institutional stocks, Yes Securities.
However, it is too early to expect a significant increase as these investors may have to wait a little longer to see a significant rise in interest rates on FDs.
“The decision to introduce G-SAP – GSec’s secondary market acquisition program is a masterstroke by the RBI. This would lead to a sharp increase in the yields of GSec bonds. The introduction of long-term VRRR (variable rate reverse repo) is an extension towards liquidity normalization “The excess liquidity will continue and will likely continue. We expect the yield curve to flatten from current levels, with the longer end of the yield curve compressing faster than the short end, ”said Lakshmi Iyer, CIO (Debt) and product manager, Kotak Mutual Fund.
This is why conservative investors should seek alternatives to bank FDs if they want higher returns. According to financial planners, mutual fund investors should prepare for low returns from debt mutual funds as the rally in returns comes to an end. Read on to find out what mutual fund investors should do?
Besides FDs and debt mutual funds, investors have the option of investing in small savings plans. The government kept the interest rates on these plans unchanged during the last quarterly review on March 31, 2021.
Interest rates for the latest postal programs
Other alternatives to FD are Pradhan Mantri Vaya Vandana Yojana (PMVVY) and RBI Floating Rate Savings Bonds, 2020. Remember that PMVVY offers a fixed interest rate throughout its tenure, while the interest rate RBI’s floating bond is reset every six months. The interest rate reset date for the RBI Floating Rate Savings Bonds is July 1, 2021.
Existing mortgage borrowers
A) Loans linked to an external benchmark
Borrowers whose home loans are tied to an external benchmark are likely to pay the same EMI for now, unless their bank reduces their margin or spread on loan interest rates. On the other hand, if your bank increases the risk premium on your loan account, the EMI of your home loan is likely to increase.
B) Loans linked to MCLR
A bank’s marginal cost-based lending rate (MCLR) is determined by both internal factors like cost of funds and external factors like reverse repo rate etc. Thus, any subsequent change in MCLR will now depend on internal bank specific factors such as cost. funds, etc.
Usually, MCLR-linked home loans have a one-year or six-month reset period. So even if your bank reduces its MCLR now, the reduction will result in lower IMEs only when your mortgage reset date arrives. On the reset date, your future IMEs will be calculated based on the interest rate in effect on that date (i.e. the reset date).
In September 2020, SBI announced, via its official Twitter account, that it had reduced the MCLR’s reset frequency from one year to six months for the loans it made. This means that any change in the policy rate will be passed on to SBI home loan borrowers more quickly.
Borrowers of loans linked to the MCLR also have the option of switching to a loan linked to an external benchmark. The change can be made by paying an administrative fee set by the bank.
C. With base rate loans or BPLR
Borrowers with mortgage linked to the base rate or the Benchmark Prime Lending Rate (BPLR) should consider switching to an external benchmark-based loan. The new lending rate regime provides better transmission of RBI policy rates compared to the base rate and loans indexed to BPLR rates, according to financial planners and industry experts.
As of March 10, 2021, SBI’s BPLR is 12.15% and the base rate is 7.40%. However, the interest rate on the loan indexed to the bank’s pension rate starts at 7% (for a male salaried borrower).
If you have a variable rate home loan and are currently paying a higher interest rate under the BPLR or the base rate, it is best for you to transfer your loan to a loan linked to an external referral to take advantage. currently lower rates.
For new borrowers, now seems like a good time to take out a home loan because interest rates are low. However, with the pandemic going on, there are other factors you need to take into account as well. For that read: Answer these 8 questions before taking out a mortgage
Additionally, to get the lowest interest rate, check and compare the margin and risk premium charged by banks above the external benchmark.
Keep in mind that not all banks have chosen the repo rate as an external benchmark. Some banks have linked the interest rate on loans to the rate on certificates of deposit, interest rates on treasury bills, etc.
(a) RBI pension rate
(b) Yield on 3-Month Government of India T-Bills as published by Financial Benchmarks India Pvt. Ltd.
(c) Yield on 6-Month Government of India T-Bills as published by Financial Benchmarks India Pvt. Ltd.
(d) Any other benchmark market interest rate published by Financial Benchmarks India Pvt. Ltd.
New borrowers should keep in mind that external interest rates linked to benchmarks are likely to be more volatile than rates linked to the MCLR. This is because changes in the external benchmark – both increases and decreases – are transmitted faster than through interest rates linked to the MCLR.