Good news for the home loan and car loan borrowers. The Reserve Bank of India (RBI) has announced reduction in the repo rate under the liquidity adjustment facility (LAF) by 40 bps to 4.0 per cent from 4.40 per cent earlier, with immediate effect. Accordingly, the marginal standing facility (MSF) rate and the Bank Rate stand reduced to 4.25 per cent from 4.65 per cent; and the reverse repo rate under the LAF stands reduced to 3.35 per cent from 3.75 per cent.
The MPC on Friday also decided to continue with the accommodative stance as long as it is necessary to revive growth and mitigate the impact of COVID-19 on the economy, while ensuring that inflation remains within the target.
With this announcement, borrowers of all types of loans — including home loans and car loans — stand to gain as they will now have to pay lower EMIs, which will put more money in their hands.
Commenting on the same, Naveen Kukreja – CEO & Co-founder, Paisabazaar.com, said, “The policy rates set by the MPC is not the sole factor determining the banks’ MCLR. Banks also factor in their cost of deposits while determining their MCLR. Hence, the full transmission of the rate cut in the MCLR-linked loans will take some time. Existing borrowers with MCLR-linked loans will continue to repay their loans according to the existing rates till the next interest rate reset date of their loans.”
The transmission of the latest rate cut will be faster in case of loans linked to repo rate. New applicants and existing borrowers of loans linked to repo rates will benefit from the policy rate reduction as and when banks reset the interest rates of their repo-rate linked loans. However, “the transmission of rate reduction will be incomplete for the fresh borrowers if the banks simultaneously increase their spread or credit risk premium during their interest rate reset,” added Kukreja.
Here is a look at how home loan and car loan borrowers will get impacted by the repo rate cut: