Home loans to FDs: 5 ways RBI's rate cut will impact your investments

With the Reserve Bank of India (RBI) cutting repo rate by 50 basis point on Friday, the RBI has cut the rate by 100 basis points so far this year.

However, this is expected to be the last rate cut for now as the RBI has changed its stance from accommodative to neutral. This means that the focus now is going to be on supporting growth instead of managing inflation as inflation is well below the preferred upper limit of 4 per cent.

The repo rate is the rate at which the RBI lends money to commercial banks. As the change in the repo rate, whether lowered or hiked, is passed on to customers, the repo rate change has a direct impact on customers’ cost of borrowing. As the RBI has lowered the repo rate, loans are set to be cheaper customers.

The 50 basis point repo rate along with the 100 basis point cut in the cash reserve ratio (CRR), which refers to the percentage of its total deposits that a bank is required to park with the RBI in liquid form, the RBI is proactive steps to boost demand and support growth, especially in a globally uncertain environment, said Sachin Tayal, the Managing Director of consultancy Protiviti India.

“These moves come at a good time, given the slower credit demand and the need to revive private investment,” Tayal further said.

Here are five ways in which RBI’s rate cuts are going to affect borrowers and investors.

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Home loans to be cheaper

As the RBI has cut the repo rate to 5.5. per cent and CRR to 3 per cent, banks are set to pass on these cuts to borrowers are loans are set to be cheaper.

Aman Trehan, the Executive Director of Trehan Iris, said that the rate cuts mark a significant boost to the real estate sector by making loans more affordable.

“Lower borrowing costs will make home loans more affordable, enhancing buyer sentiment, particularly in the affordable and mid-income segments. Additionally, the 100 basis point cut in the Cash Reserve Ratio improves liquidity, enabling banks to pass on the benefits to consumers more effectively,” said Trehan.

How will EMIs be affected?

If you have a home loan of Rs 50 lakh for a period of 20 years, the EMI has dropped by around by around Rs 3,164, according to Deepak Kumar Jain, the Founder and CEO of CredManager.

Jain further said, “For loans of Rs 1 crore and Rs 1.5 crore, the monthly savings are approximately Rs 6,329 and Rs 9,493, respectively. While these savings aren’t massive, they do improve affordability, especially in a high-cost housing market.”

A home loan with an outstanding amount of Rs 50 lakh at an interest rate of 8.5 per cent for 20 years, you would save Rs 7.47 lakh in the entire tenure, according to an analysis.

Fixed deposit investors to be disappointed

While borrowers are set to have good times, rate cuts bring bad news for fixed deposit (FD) investors as their interest rates are set to fall.

Analysts have said that going for medium- to long-term FDs can be beneficial at the moment if you want to go for FDs at all.

‘A major relief for borrowers’

The RBI’s rate cuts are a “major relief” for borrowers as EMIs are set to fall, according to Vinit Bolinjkar, Head of Research at Ventura.

“The MPC also shifted its stance to neutral and announced a staggered 100 bps CRR cut to 3 per cent. These measures offer timely support to the economy and markets amid global uncertainties,” said Bolinjkar.

RBI to focus on supporting growth

As Governor Sanjay Malhotra said that the RBI was changing its stance from accommodative to neutral, no more rate cuts are expected for some time. This indicates that the RBI is now going to focus on supporting growth.

“With the policy stance now shifted to ‘neutral’, the RBI is signalling that while inflation is still on its radar, the focus is gradually shifting toward supporting growth. This creates an opportunity for banks and lenders to step up credit to retail customers and small businesses, which could drive growth from the ground up. At the same time, it’s important that financial institutions stay alert on risk and compliance, so they’re well prepared for any changes in the economic environment,” said Sachin Tayal, the MD of Protiviti India.