RBI Repo Rate Cut - How it Affects Borrowers

The coronavirus outbreak has literally shaken the nerves of the stock market. Right now, the view of investors towards the new future is that of uncertainty and negative. The stock market, therefore, is bearish.

To solve this problem, the Reserve Bank of India has taken steps to calm the nerves of the stock market. Last Friday, 27th March 2020, the RBI announced that it has cut key policy rates. This step was taken to help the economy during the coronavirus pandemic lockdown. Most other countries under the grips of this deadly pandemic are taking similar steps as well. This is to slow down or completely mitigate the recession resulting from the pandemic.

RBI’s Repo Rate Change

The key rates cut include the Repo Rate and the Reserve Repo rate. The repo rate was cut by 75 basis points while the reserve repo rate was cut by 90 basis points. 

Such a step was taken by the RBI of course with best interests in their hearts. However, it will be creating some problems for both investors and borrowers.

In this article, let us see what are some of the problems borrowers shall be facing after this change are.

Impact on borrowers

This unexpected repo rate cut from the RBI is stated to reduce EMIs, which is important to borrowers. With less interest to pay back loans, it will be cheaper to take new loans.

Here is an example of how a loan you have already taken is likely to be affected by the rate cut.

Loan amount	Rs. 3,00,000
Loan tenure	20 years
Current interest rate	7.95%
Current EMI	Rs. 24,999.92
New interest rate	7.20
New EMI	Rs. 23,620
Cut in EMI	Rs. 1379.45

Here is how this will affect different categories of borrowers.

Existing borrowers:

Borrowers who already have existing loans that are linked to external benchmarks like treasure bills and repo rate, can expect to see their monthly EMI decreasing in the coming months. As per Reserve Bank of India’s directive on linking of loan interest rates to external benchmarks, the rates are to be reviewed by banks every 3 months.

Borrowers with loans linked to MCLR

Borrowers in this category will benefit with lower loan rates, but only when their banks reduce it. This is because the MCLR is dependent on not only external factors, but also the bank’s own internal factors. Going further, the reduction in MCLR rates will only read to lower EMI when your home loan’s reset date comes.

Want to switch to a loan rate based on an external benchmark? You need to give an administration cost. However, experts suggest that you do this only when the difference between the two rates is at least .50%.

Borrowers whose loans are linked to BPLR or base rate

Borrowers with home loans linked to Benchmark Prime Lending Rate should think of switching to an external benchmark-based loan. This gives them better transmission of policy rates.

New borrowers

One of the best things is that new loans shall be considerably cheaper. Taking a new loan linked to external benchmarks should be a priority for new borrowers. When doing so, make sure to compare the risk premium and spread being charged by banks above the external benchmarks. This gives you the cheapest interest rate.

At the end of the day, please do remember that when RBI increases the key rates, your interest rates shall go up as well. This makes interest rates linked to external benchmarks more volatile than MCLR linked interest rates.