Announcing its fourth repo rate cut in 2015, the Reserve Bank of India (RBI) lowered the benchmark repo rate by 50 basis points to 6.75% on 29 September. RBI's latest move comes as a positive surprise as a majority of the banks were only expecting a cut of 25 basis points. The last time the repo rate was at 6.75% was in March 2011. However, the RBI has left the cash reserve ratio (CRR) and statutory liquid ratio (SLR) untouched.
Here's how the latest rate cut can impact your personal finances - it's mostly good news!
1. Impact on housing and consumer loans
In terms of borrowing costs, the repo rate cuts will affect general consumers and corporates in a similar way. New borrowers can expect lower interest rates for home and car loans. People with existing home loans (on floating rates) can similarly expect lower EMIs and reduced interest payout. If you have a home loan on a fixed rate, you can either renegotiate your interest rates with your existing lender or transfer your existing home loan to a new lender at lower rates. As of now, the RBI has cut down repo rates by 125 basis points in 2015, in response to which SBI has so far cut its base rates by 80 basis points. HDFC Bank had already cut down its base rates by 65 basis points till August 2015. It is yet announce the lowering of its base rates. The table below explains how your home loan or car loan EMIs will change in the scenario of 30, 40 or 50 bps cuts by commercial banks or lending institutions.
2. Impact on fixed deposits
The repo rate cut can prompt banks to lower their fixed deposit rates. Therefore, if your liquidity permits, you can go for some fixed deposits before the banks react to RBI's latest rate cuts and lower their FD interest rates. At present, bank fixed deposits for one year are hovering around 7.5¬-8% and are expected to fall to 7-7.25%. However, note that the change in rates will not impact existing FDs. If you wish to open an FD, this is the right time before the new rates become effective. SBI has already announced that it will cut deposit rates by 25 bps with effect from 5 October.
3. Impact on debt-oriented mutual funds
Lower rates are good news for bond markets, which are very sensitive to interest rate changes. When interest rates fall, prices of bonds go up. So, if you are a conservative investor, you can think of investing in mutual funds that have high exposure in bond markets. As debt funds become eligible for long-term capital gains tax after three years, you should stay invested for at least three years to reap the long-term capital gains tax benefits.
4. Impact on equity market mutual funds
Rate cuts bring good tidings for equity markets, and hence for equity mutual funds investors too. Interest rate cuts increase the profitability of corporates by lowering their borrowing cost and increasing their revenues because of increased consumer spending. However, lowering of GDP growth forecasts from 7.6% to 7.4% by the RBI and its concerns about poor monsoon, sustained decline in exports and lower-than-expected momentum in industrial production can act as dampeners in the performance of equity mutual funds.
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