<div><em><strong>The ball is in the bank's court now to reduce base rate and pass on the benefit to borrowers. Rejig, however, is required for bank fixed deposit investors, writes Sunil Dhawan</strong></em></div><div> </div><div>Markets always look for triggers. For months, it kept waiting for the big rate cut to happen. It came albeit at a time when the global markets were at a turmoil. On 29th when Reserve Bank of India (RBI) was announcing its monetary policy statement, global indices were down by over 2 per cent on average including BSE and Nifty.</div><div> </div><div>On the back of inflation data and the slowing growth rate, RBI cut the repo rate by 0.5 per cent while keeping the CRR unchanged. Repo rate is the rate at which banks borrow from RBI while CRR refer to quantum of fund to be parked mandatorily with RBI. Both of these measures along with several other tools are used by RBI to infuse or suck out liquidity from the market. </div><div> </div><div><strong>Base cut by banks</strong><br>From 7.25 per cent, the repo rate stands at 6.75 per cent now. In September 2014, it stood at 8 per cent. Overall, the repo rate has been reduced by 1.25 per cent over the last 12 months. However, the base rate is hardly lower by 0.25 for majority of banks. This leaves room for a base rate cut to happen soon. Andhra Bank was the first to hit the block by reducing its base rate (rate below which banks cannot lend) by 0.25 per cent within an hour of the announcement. Early in September, HDFC Bank had already cut its base rate by 0.35 per cent thus reducing the base rate from 9.70 per cent to 9.35. This appeared to be an aggressive move by the country's largest lender and had certainly taken the market by surprise. </div><div> </div><div>With festive season nearing, SBI, ICICI and Axis bank too are expected to lower the rates. Rishi Mehra, Co-Founder, Deal4loans.com says, “Home loan and Car loan rates should fall by 0.50 basis points and expect Home loan rates to come at 9 per cent.” Borrowers of all kinds including corporates and retail individual stands to gain if rates fall further. The previous base rate reduction happened in June when Axis bank, SBI, ICICI and HDFC all of them cut their base rates. SBI's current base rate is 9.70 per cent, for ICICI its 10 per cent, while for Axis its 9.85. Such variation may not sustain longer and soon a cut may be witnessed in these institutions.</div><div> </div><div><strong>The Impact</strong><br>A 0.25 per cent reduction may not appear to be a big advantage but over period of time if rates keep falling and banks continue passing on the benefit, the cumulative impact could be huge. Let' assume, outstanding amount on a home loan is Rs 10 lakh, with 20 years remaining and at an interest rate of 10.50 per cent at an EMI of Rs 9,983. If rate falls by 0.25 per cent, keeping the EMI constant, the tenure falls by about 13 months. If the rate is reduced by 0.5 per cent, the effect translates into nearly 24 months and you would end your loan much earlier. </div><div> </div><div><strong>New home loan takers</strong><br>For those waiting for home loan rates to fall, the right time has come. With high level of unsold inventory with builders, it's time to bargain with them. A lower rate of interest further brings the cost of owning the house down. On a 9.85 per cent home loan for 15 years for Rs 40 lakh, the total interest burden can be less by Rs2 lakh if base rate is less by 0.5 per cent. </div><div> </div><div><strong>Existing home loan holders</strong><br>When bank base rates fall, those holding home loan on flexible interest rates benefits as against those holding fixed home loans. Most banks have passed on the benefit of lower base rate to their home loan customers. For someone with an existing a home loan, the benefit can be availed in two ways — either EMI's may be reduced or the tenure may be reduced. Banks on their own typically reduce the tenure automatically and thus transfer the benefit of lowering base rate to their customers. Ask your banker, how has the adjustment been done or log on to your home loan account online to see if the benefit has been passed on to your account. If you wish to lower your EMI, you need to contact your banker and may have to submit revised ECS mandate. </div><div> </div><div><strong>Switching over</strong><br>If the existing loan is nearing completion, the impact of base rate change may not be much. So, if your exiting loan is around three years old, consider switchover or refinancing the loan from another lender if the rate differential is high. </div><div> </div><div><strong>The negative impact</strong><br>With RBI cutting repo rate by 50 basis points, the banks might not pass on the benefits to borrowers by the same margin. This is because the cost of funds for a bank is also dependant on what rates it offers to its depositor. To lower the cost of funds further, the deposit rates are also expected to fall. This directly impacts all those investors who rely on regular and fixed income from bank deposits. </div><div> </div><div><strong>Fixed deposit investors</strong><br>Lowering of interest rates understandably are favoured by corporates, markets and anybody who is a borrower. The biggest casualty are the fixed income investors especially the retired citizens who rely on fixed income for their regular income needs. Presently, banks are offering interest rates around 8 per cent or even lower across most tenures on the bank fixed deposits. </div><div> </div><div>For all those investing in bank FD's for their regular income needs or otherwise too, using the 'Laddering' approach will help. In Laddering, instead of putting the entire sum in a certain term-deposit, the sum is spread across term -deposits of varying maturities. For example, instead of putting Rs 5 lakh in 3-year deposit, one may spread across 1 lakh each in 1-year, 2-year…5-year deposits. What this approach does is to manage the interest rate risk. Laddering also helps in keeping your funds liquid. Higher amount can be put into the deposit offering the highest rate. </div><div> </div><div>In doing so, there is always a re-investment risk associated with any fixed income product of a fixed tenure. But then, predicting interest rate movement is always an impossible tasks even for banks and corporates. Laddering strategy helps in minimizing the risks but cannot be the ideal approach. One may even have to look at post office instruments for their fixed income needs. PO monthly income scheme is still at 8.4 per cent providing monthly income. </div>
_20241008215120_original_image_25.webp)
