With the Reserve Bank of India (RBI) slashing the repo rate by 25 basis points to 6.25 per cent, interest rates on fresh loans are likely to decline. Notably, today’s repo rate cut was the first in nearly five years.
With short-term funding available cheaply to banks, personal loans to retail borrowers could also see a fall in interest rates in the coming weeks.
The 25 basis point cut in the repo rate is seen as the start of a rate cut cycle. Typically, banks cut interest rates on floating loans, such as home loans, that are linked to the repo rates.
The loans are governed by the marginal cost of funding-based lending rates, or MCLR, which consists of deposit rates, repo rates, operating costs, and the cost of maintaining the cash reserve ratio.
MCLR refers to the marginal cost of fund-based lending rates below which banks are not permitted to lend. In 2016, the RBI replaced the base rate system with the MCLR-based lending rates.
When will the rate cut start?
It is not a rule of thumb that banks pass on the rate cut benefit to borrowers in the same proportion. However, some of the benefit which banks receive on account of rate cuts is typically passed on to the borrowers in terms of lower interest rates on loans.
Notably, personal loans have fixed interest rates that are not subject to change during the loan’s tenure. However, home loans and car loans, which have floating rates of interest, are more volatile in nature.
So, only the fresh personal loans that the banks will offer in the future will be given at a concessional rate of interest, not the existing loans.
“Each bank has its own norms. For the new loans, banks are expected to pass on the benefit of lower rates, but for the existing loans (home and car loans), it may take time,” says Sridharan S, Founder of Wealth Ladder Direct.
“The RBI’s recent 25 basis point repo rate cut, though anticipated, is designed to ease borrowing costs,” says Kushal Rastogi, Founder & CEO of Knight Fintech.
(Note: Raising a loan comes with its own risks. So, due caution is advised)