In a major relief for borrowers, the Reserve Bank of India (RBI) on Friday lowered the repo rate by 40 basis points from 4.4 per cent to 4 per cent. The reverse repo rate was also reduced to 3.35 per cent. These rate cuts were made in order to limit the impact of the nationwide coronavirus lockdown on the economy. Borrowers, especially those whose loans are linked to external benchmarks like the repo rate can rejoice. The apex bank last cut the rates in its March 2020 in an advanced monetary policy review. In total, it has cut the repo rate by 75 bps since the lockdown started.
Note: 100 basis points equal one percentage point.
Here's how borrowers are likely to gain from the RBI's rate cut, depending of whether and how much banks and non-banking lenders pass on the benefits to customers.
Impact on EMIs
1. Borrowers whose loans are linked with an external benchmark — repo rate, treasury bills etc — as mandated by the RBI can expect to see their EMIs coming down in the next three months.
This is because according to the RBI circular on linking of loan interest rates to an external benchmark dated September 4, 2019, the rates have to be reviewed and reset by banks at least once every three months. So, today's rate cut will lower a borrower's EMI outgo in the next three months.
2. Borrowers whose loans are linked to the marginal cost-based lending rate (MCLR) will benefit when their banks reduce loan rates in view of their cost of funding coming down due to reduced rates.
3. RBI rate cut will make new loans cheaper.
4. There is a possibility that personal loans, often taken out for a new car or home improvements, would also get a little cheaper.
Do note, however, that the RBI's rate cuts are designed specifically to tackle the impact of the coronavirus crisis on economic activity. So, the rates could again be reviewed after some time.