RBI Policy impact: No change in your EMI on loan for now

With the Reserve Bank of India choosing to keep key rates steady as it focuses to stem the rupee’s slide against the US dollar (USD), the central bank has hinted at rolling back the liquidity tightening measures when stability returns to the currency market, enabling it to resume supporting growth.

A fall out of the development implies that your equated monthly instalment (EMI) on a loan also remains unchanged, at least for now.

While reviewing the policy, the central bank has kept the repo rate, the rate at which it lends to commercial banks, steady at 7.25%; and the cash reserve ratio (CRR), the proportion of deposits banks must keep with the RBI as cash, was also left unchanged at 4%. The reverse repo rate also stands at 6.25%.

“A status quo on interest rates will not alter the EMI structure. The RBI had done some tinkering with the policies in the last fortnight to arrest the rupee’s fall. That had an impact on entities such as HDFC Ltd and some housing finance companies that had increased their fixed deposit (FD) rates. Liquidity is clearly an issue and I don’t see any drastic actions by banks,” said Gaurav Mashruwala, a certified financial planner.

Points out Sonal Varma, economist, Nomura: “It is a status quo policy and I don’t expect any significant change in the borrowing and lending rates going ahead as a result of this policy review.”

Many instalment loans have a fixed interest rate. In such cases, the interest rate and the monthly payments stay the same for the term of the loan. The advantages of such loans is the steady outflow that you experience, which helps you better manage your budgets and the comfort that the cost of the loan will not vary.

However, just like all good things come with a rider, this loan too has its disadvantages; when interest ease, you do not get any benefits and most often when going for a fixed rate, you will realise that it is marginally higher than the prevailing floating rate loans.

A floating rate loan, on the other hand, has variable interest rate. So, when the rate changes, the monthly payment changes also. Marginally lower than the fixed interest rate, the biggest advantage of such an option is the lower outgo you experience when interest rates fall. However, you are vulnerable to rate hikes, which means you will have to budget for increases when the rates go up.

“If someone has to buy a house, he cannot afford to delay. At the same time, if someone has investible surplus and wants to invest in a FD and is confused whether the banks will offer a higher rate of interest going ahead, I suggest it is better to wait as one can expect some changes and can land a good deal,” Mashruwala adds.

Suggests D K Aggarwal, CMD  SMC Investments and Advisors: "It has become quite evident that RBI is not going to cut rates. The rate cuts in the past also did not get transmitted meaningfully in the banking system because of rise in delinquency rates and overall deficit in the banking system. Even if the RBI cut rates, then also banks would not reduce rates as now there would be shortage of funds of more than 1% of Net Demand and Time Liabilities (NDTL). The recovery is yet to gather momentum."