RBI Retains Repo Rate at 4%: How This Affects Existing & New Loan EMIs?

RBI Retains Repo Rate at 4%: How This Affects Existing & New Loan EMIs?

The Monetary Policy Committee of Reserve Bank of India in its second bi-monthly meet of this financial year has decided to keep repo rate and reverse repo unchanged at 4.00 per cent and 3.35 per cent respectively. The MPC has unanimously maintained accommodative stance to support growth.

Repo rate is the benchmark rate at which central bank lends to commercial banks, while the reverse repo rate is the rate at which RBI borrows from banks. Thus any change in repo rate & reverse repo rate directly impacts the liquidity of commercial banks and thereby affect the lending rates of the financial institutions.

The present benchmark lending rates are already lowest since 2000. Amidst financial disruptions caused by COVID 19 pandemic, the RBI had imparted enough liquidity to commercial banks by slashing repo rates by 115 bps and commutative reduction of 250 bps since February 2020.  Amid slowdown caused due to pandemic, RBI took these steps to boost the credit demand. 

While continuing the accommodative stance for growth, the RBI Governor Shaktikanta Das said: With COVID-19 infections rising unabated under fragile macroeconomic and financial conditions, we propose to undertake additional developmental and regulatory policy measures to (i) enhance liquidity support for financial markets and other stakeholders; (ii) further ease financial stress caused by COVID-19 disruptions while strengthening credit discipline; (iii) improve the flow of credit; (iv) deepen digital payment systems; (v) augment customer safety in cheque payments; and (vi) facilitate innovations across the financial sector by leveraging on technology.

Impact of unchanged repo rates on loan EMIs

A) Impact on loans linked to external benchmark such as RLLR

The loans linked to external benchmark exhibit immediate impact with change in repo rate. Now with no cut in repo rates, the EMIs for loans linked to external benchmarks will remain the same.

B) Impact on loans linked to Internal Benchmark such as MCLR

In similar lines, there will be no pressure on commercial banks to cut down the marginal cost-based lending rate further. So the EMIs will continue to remain same.

The effective rate of loans linked with MCLR changes according to reset date. All those loans linked with 6 month or 1 year MCLR rate are however going to tap the benefit of lowered MCLR. Banks have been reducing the lending rates since March 2020 on the backdrop of reduced repo rates.

Will Rate of Interest for New Borrowers Change?

Since March 2020, RBI has reduced benchmark lending rates by 250 bps and thus lending rates have been drastically declining. The current decision by RBI will not attract further cut in lending rate. However, high liquidity with commercial banks backed by lowest ever lending rates, this is the opportune time to Avail of Home Loan, Car Loan or Business Loan.

Impact on Fixed Deposits

As the central bank decides to keep the benchmark lending rate unchanged, we can hope that banks will also keep the returns on fixed deposits unchanged. Amidst lowering rates regimes since March 2020, the returns on FDs were falling consistently.

Now let’s understand what will the pause on rate cuts would mean for the borrowers.

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