RBI Keeps Repo Rates Unchanged, but don’t be Disheartened!

The Reserve Bank of India’s (RBI) decision to keep the repo rate unchanged at 6.25 per cent hasn’t gone down too well with the realty experts. All expected the rates to come down in the backdrop of recent demonetisation and increased liquidity with the banks. But, the apex bank prefers to wait and watch in order to have more visibility on the impact of demonetisation.

Meanwhile, old home loan borrowers linked base rate (loans taken before April 1, 2016) may expect lower equated monthly installments (EMIs). If the banks reduce their base rate, the EMIs linked to base rate (loans taken before April 1, 2016) will fall.

There are several reasons behind this RBI’s decision:

Excess liquidity in the system

Post demonetisation, the RBI has asked the banks to park nearly 4 lakh crore with banking regulators under its reverse repo facility as a temporary mechanism since the deposited amount is five times higher than the withdrawal amount in last one month. This impacted their cost of funds as the return on savings account will remain an outflow for banks. Therefore, RBI has decided to delay the rate cut until the liquidity in system is balanced.

Fed rate hike

Soon, the US Fed rate will increase which results weakening of the Rupee. If RBI would have decided to cut the rate now and later reverse the step by increasing it then it may have sent a wrong signal to the economy. RBI chose to wait and act rationally.

Impact on MCLR

With demonetisation in effect, banks’ lending rates are going to slide down due to huge inflow of funds. Raising the reserves to balance liquidity is only a temporary measure. MCLR rate would further go down in near future.

Effect on home loan EMIs

Since the rate cut has been paused, old home loan borrowers should not expect a reduction in EMIs. Now is the good time they can convert their loans to MCLR-linked loans (effective since 1 April, 2016). Most banks offer home loans linked to their one-year MCLR. Since the one-year MCLR is reset annually, any announcement regarding cutting repo rate will come in effect in December 2017 only.

The RBI already reduced repo rate earlier by 25bps to 6.25 per cent and if we believe on economists’ and experts’ speculations then rates will be cut in the next RBI policy meet in February 2017.

Source: ET Realty

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