How Repo Rate Cut Will Impact Your Pocket?

How Repo Rate Cut Will Impact Your Pocket?
How Repo Rate Cut Will Impact Your Pocket?
Rajat Mishra - 24 May 2020

The RBI Governor Shaktikanta Das slashed the repo rate again by 40 basis points (100bps=1 per cent), bringing down the repo rate to an all-time low of 4 per cent from 4.4 per cent. The RBI took this decision by advancing the monetary policy meeting from the first week of June to May 22, 2020. The RBI has slashed the repo rate by 115 bps ever since the lockdown has begun. But this prudent move by the RBI has brought good news for borrowers and bad news that interest rate of your FDs will go down.

So, the latest rate cut is bad news for a senior citizen who relies more on the interest income. With this rate cut one thing is quite certain that the banks are going to cut the interest rate. Even in March when the apex bank slashed the repo rate, State Bank of India cut the interest rate by 50 bps. Now, the SBI Fixed Deposit is offering 5.50 per cent, for senior citizens.

Impact on borrowers

The good news is for the borrower as this rate cut will bring down their EMIs and will also make it cheaper. But it is a positive news for borrowers especially those whose loans are linked to external benchmarks like the repo rate. As the repo rate is the rate at which commercial banks borrow from RBI. So, the rate cut will mean the cost of borrowing will be lower for commercial banks.

But the transmission of this rate cut will be faster in external benchmark linked loans. But for the borrower whose loans are linked to the Marginal Cost-Based Lending Rate (MCLR), the benefit will pass onto those customers when their banks will decide.

It is due to the fact that MCLR is a tenor-linked internal benchmark means the rate is determined internally by the bank depending on the period left for the repayment of a loan. So, MCLR is dependent on both the external and internal factors of the bank. So, existing borrowers with MCLR linked loans will continue to repay their loans according to the existing rates until the next interest rate reset date of their loans. Usually that reset period is mentioned in your loan agreement.

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