RBI cut repo rate by 25 bps: What it means for borrowers, what they should do, what they shouldn't

The Reserve Bank of India has cut its key policy rate by 25 basis points to 6.00 percent, the lowest since November 2010. If you are a borrower or looking to take a loan, you have reasons to cheer. This cut in the key policy rate means cheaper loans for borrowers. Since the interest rates in the economy are already trending down, it is likely that the transmission of the latest cut may happen sooner.

Remember, State Bank of India, the country's largest bank, has just cut savings account rate to 3.5 percent per annum. The move just reinforces the downtrend in the interest rates.

RBI cut repo rate by 25 bps: What it means for borrowers, what they should do, what they shouldnt

A Reserve Bank of India (RBI) logo is seen at the entrance gate of tts headquarters in Mumbai, India June 7, 2017. REUTERS/Shailesh Andrade

However, a clear trend will emerge only after banks' asset liability committee meetings, but loans are expected to be cheaper. After all, even a minor reduction in home loan rate could be a big relief for many new borrowers. The existing borrowers may have to wait until the next reset period if you are on MCLR regime of home loan. If you are on base rate-based loan, you may want to switch your loan to MCLR.

In fact, it’s only a matter of time that lenders will start announcing their new rates, and switching lenders to get a better deal is a good strategy, especially if you are in the initial years of your loan. The best thing to do is bargain with your lender for better rates. If you are a good borrower, i.e if your credit score is good, the lender will actually give your better terms. No banks would want to lose a good customer.

Here’s how to decide whether you should wait for a further reduction in rates by your lender or switch to a rival now.

Let’s say, your home loan rate is 9.25 percent. Switching to another lender for a meagre 10 bsp may not reduce the total cost of borrowing. You sure have to spend time and do a lot of paperwork. In such a situation, bargain with your lender to decrease rate slightly or wait until they announce a rate cut. But, if you are stuck on higher rate of more than 10 percent, then you should switch loans to a low-cost loan. There are many who are still stuck on rates more than 12 percent.

Rates are expected to fall across all loan types. Remember, do not go for personal loans or consumer loans only because rates are low. You may have to keep in mind that jobs are not secure these days and, God forbid, any such shocker can impact your financial situation badly. Caution is the buzzword.

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Updated Date: Aug 02, 2017 16:45:04 IST

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