The Reserve Bank of India (RBI), in its fifth bi-monthly policy statement for the year today, has not gone ahead with a rate cut and appears to have decided to wait for the impact of demonetisation to be more visible.
However, despite this, home loan borrowers may see lower equated monthly instalments (EMIs), which may not fall for all across the board.
The EMIs on home loans linked to base rate (for loans taken before April 1, 2016) will fall only if the banks reduce their base rate, while the EMIs on home loans linked to the marginal cost of funds based lending rate or MCLR (for loans taken after April 1, 2016) get re-set every 12 months.
The lower EMIs could, therefore, be only for new home loan borrowers who take loans post demonetisation. Even though the RBI hasn’t cut repo rates, as the bank’s are flush with funds post demonetisation and their cost of funds have come down, the MCLR will be lower, benefiting new home loan takers.
Here’s why the RBI could have keep the rate unchanged at 6.25 per cent
RBI has swept the excess liquidity in the system into its reserves: Post demonetisation, the banks have been flooded with deposits of nearly Rs 5.12 lakh crore, while the withdrawals have been only a fifth of the deposits, at Rs 1.3 lakh crore. Of this amount, the banks have been asked by the RBI to park nearly Rs 4 lakh crore (without earning any interest) with the banking regulator under its reverse repo facility as a temporary mechanism. The return on savings account will, however, remain an outflow for banks, thus impacting their cost of funds. Therefore, a delay in rate cut has happened, as many had expected.
Fed rate hike: The US Fed rate is expected to be hiked, thereby triggering dollar outflows, resulting in the weakening of the Rupee. This may well have influenced the RBI to hold rates as cutting the rate now and then reversing the step by increasing the rate in near future may have sent wrong signals to the economy. The RBI chose to wait and then act later.
Impact on MCLR
Still, post demonetisation, banks’ lending rates are sure to slide further down. Since April 1, 2016, when the MCLR was introduced, most banks have been reducing it as their cost of funds came down. The huge inflow of funds post demonetisation could make them cut MCLR rate further. The excess liquidity in banks post demonetisation being sucked out by the RBI by raising the reserves is only a temporary measure. Expect lower MCLR rates within a few days of the RBI meet.
Impact on home loan EMIs
As there is no rate cut now, existing home loan borrowers who have loans linked to banks’ base rate should not expect any reduction in EMIs. They can look forward to converting their loans to MCLR-linked loans.
All bank loans, including home loans, taken after April 1, 2016, are now linked to the bank’s MCLR. Earlier, home loans were linked to the bank’s base rate.
Currently, the 12-month MCLR for most banks is in the 9.05 to 9.45 per cent range. After the mark-up (spread), the actual home loan rate, on an average, is around 9.35 per cent.
Most banks offer home loans linked to their one-year MCLR, which is reset annually. So if one takes a home loan in December 2016 and the RBI cuts repo rate in February 2017, even though banks’ MCLR comes down in the same month, the effect of it for the borrower will be seen in December 2017 only.
In effect, there is a waiting period (usually a year) for the borrowers before they see an impact on their EMIs.
Do not, therefore, expect the EMIs to fall immediately for existing borrowers with MCLR-linked loans even when the RBI cuts rate.
The wait cannot prolong
To support growth, there could be a rate cut in the next RBI policy meet in February 2017. As widely seen across sectors, the economic activity has dampened. Fitch Ratings has already lowered India’s GDP growth forecast for this fiscal to 6.9 per cent from 7.4 per cent, indicating that there will be “temporary disruptions” to economic activity post demonetisation. In its last monetary policy announcement on October 4, the RBI reduced its repo rate by 25 bps to 6.25 per cent.
The recently released data by the Central Statistics Office showed the domestic economy expanded 7.3 per cent during the July to September quarter, which was at a faster clip than the 7.1 per cent growth reported for the prior three months, but below the 7.6 per cent jump recorded in the year-ago period. One may, therefore, witness a 25 basis cut in rates, if not more, in the upcoming meet.
The RBI is aware of the impending danger to the growth rate, especially because of demonetisation. By the next time when the board meets, much of the uncertainty would be settled and the RBI may be in a better position to take calls. In the meantime, whether the RBI cuts rates or not, new home loan borrowers can wait for the dust to settle and wait for February monetary policy for a better clarity, unless the house they are looking for is well within budget and the wait cannot be prolonged.
Source: Sunil Dhawan | ECONOMICTIMES.COM
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