Reserve Bank of India (RBI) has cut Repo Rate by 50 Basis points (0.5%). RBI Governor unexpectedly and surprisingly has announced the biggest interest rates cut in nearly 3 years.
But why this rate cut is important? What are these rates? Why a repo rate cut of just 0.5% is so important? What does RBI rate cut means to you and me? What is the impact of RBI’s rate cut on home loan and other loan EMIs (Equated Monthly Instalments)?
When we need money, we take loans from banks; banks charge certain interest rate on these loans. This is called as cost of credit (the rate at which we borrow the money).
Similarly, when banks need money they approach RBI. The rate at which banks borrow money from the RBI by selling their surplus government securities to the central bank (RBI) is known as “Repo Rate.” Repo rate is short form of Repurchase Rate.
So, higher the repo rate higher the cost of short-term money and vice verse. If the repo rate is low, banks have to pay lower interest amount on their borrowings. This in turn enable them charge lower interest rates on the loans taken by us. Lower repo rate can also strengthen positive momentum in the economy. These are the main reasons for markets turning ecstatic during last few days.
RBI’s rate cuts do not necessarily mean that the borrowers benefit immediately. Your banker has to reduce its Base Lending rate. If your bank reduces the base rate then only you can see your Loan EMIs falling.
These rate cuts will not have any impact on Fixed rate home loans or Fixed rate consumer loans. The rate of interest is fixed with respect to fixed loans.
The existing bank customers (who have taken loans) can see either their Loan tenures or EMIs coming down. By default the banks reduce the loan tenure instead of loan EMI. That means your monthly EMI instalment amount remains the same. The rate cut will make a substantial difference if the remaining loan term/tenure is very long.
If you want to get EMI reduced, you may have to contact your banker or lender to reset the term and conditions. Also, don’t forget to submit new ECS mandate for new EMI amount.