RBI Credit Policy: What rate cut means for you

The RBI cut benchmark rates by 25 basis points (bps) on 4 October, bringing down the repo rate from 6.5% to 6.25%. What does this mean for you the investor or borrower?

For borrowers
RBI Governor Urjit Patel has expressed disappointment over the low transmission of earlier rate cuts by banks and promised to review the marginal cost lending rate (MCLR) mechanism of arriving at lending rates. This time too, banks have only made small cuts in lending rates.

If the new RBI Governor acts as promised, lending rates may fall faster in coming months. So should you wait for further reduction in rates by your lender or take steps to reduce your rates by shifting to another lender? You need to calculate your exact borrowing cost. Let us use the home loan as example. If your home loan cost is already low (below 9.5%), it may not make sense to shift to another lender to reduce the costs further by 5-10 bps. However, there are others who are stuck with high borrowing cost. “There are several borrowers who are still holding on to housing loans with interest ranging between 10% and 11%, so they need to shift immediately to some low cost loan,” says Vishal Dhawan, CEO, Plan Ahead Wealth Advisors.



For depositors
Banks have been slow in reducing deposit rates too. The government not reducing rates of small savings schemes in accordance with market rates being one of the reasons. “Since bank deposits face competition from small savings instruments, banks can’t cut deposit rates drastically,” says Dhawan. However, this is good news for investors because they will be able to lock-in to fixed deposits or recurring deposits at the prevailing high rates.