Good news for home and car loan borrowers. The Reserve Bank of India (RBI) has announced an immediate reduction in the repo rate under the Liquidity Adjustment Facility (LAF) by 40 basis points to 4.0 percent from 4.40 percent earlier. Accordingly, marginal standing facility (MSF) rates and bank rates were lowered from 4.65 percent to 4.25 percent; and lowered the reverse repo rate under the LAF standard from 3.75 percent to 3.35 percent.
The MPC also decided on Friday to continue the accommodative stance as long as it takes to revive growth and mitigate the impact of COVID-19 on the economy, while ensuring inflation stays within target.
With this announcement, borrowers of all types of loans – including home and auto loans – will benefit as they now have to pay lower EMIs, giving them more money.
Naveen Kukreja – CEO and Co-Founder, Paisabazaar.com, said: “The policy rate set by the MPC is not the only factor determining the MCLR of the banks. Banks also take their deposit costs into account when determining their MCLR. Therefore, the full transmission of the interest rate cut in the MCLR-linked loans will take some time. Existing borrowers with MCLR-linked loans will continue to repay their loans at the existing rates until the next interest reset date of their loans. “
The transmission of the last interest rate cut will be faster in the case of loans linked to repo interest. New applicants and existing borrowers of repo-interest-linked loans will benefit from the cut in the policy rate as banks revise the interest rates of their repo-interest-linked loans. However, “the transmission of rate cut will be incomplete for the new borrowers if the banks simultaneously increase their spread or credit risk premium during their interest rate reset,” added Kukreja.
Here’s a look at how mortgage and auto loans will be affected by the repo rate cut: