After a surprise 0.35% rate cut in August, the RBI is back with a 0.25% rate cut on Friday, which is its fifth consecutive lending rate reduction. The repo rate stands at 5.15% now, its lowest level since March 2010. However, this is not the end of the rate cut season if industry pundits are to be believed. Going ahead, many expect Mint Street to take the repo rate to 4.5% (which means another 0.65% cut in the offing) by FY20 to India’s lowest policy rate. Be that as it may, we assess the impact of the latest rate cut on your investments, loans, deposits and so on. Read on.
The impact on loans
For borrowers, the latest 0.25% rate cut means eventually lower EMIs on home loans and other credit lines. While it’s true that the cumulative transmission of the 1.10% rate cuts prior to the latest action has been only around 0.29% transmission on fresh bank loan rates, things are expected to change fast.
First time home buyers now will be benefited most as banks link all new floating rate loans to any of the four external benchmarks specified by RBI from this month onwards. Lower EMIs this festive season will boost consumer demand and many fence-sitters should make that jump of acquiring property ownership, says said Tanuj Shori, Founder and CEO, Square Yards.
However, there are some caveats. “The new benchmark applies to new loans only, and the rates for existing borrowers will continue the same way till their tenure ends. They can consider transferring their MCLR-linked or base-rate linked to a repo-linked loan. Loans taken from NBFCs and housing finance companies (HFCs) will see no change as these will not be linked to an external benchmark,” says Adhil Shetty, CEO, BankBazaar.
The impact on deposits
With the rate cut, the chances that the banks would cut fixed deposit rates are high. That’s the flipside of cheaper loan EMIs!
Those investing in FDs, especially senior citizens who primarily depend on interest income, will be the worst hit. SBI has already reduced its FD rates thrice since August.
Nevertheless, with low inflation and volatility in the stock market, it would be wise to maintain liquidity using fixed deposits which also provide a moderate rate of return, says Shetty.
You can also consider investing in small saving schemes, interest rates for which was not changed by the government for the October-December quarter.
The impact on stocks
The immediate reaction from the stock market to the repo rate cut was a disappointment. But, that was more because RBI downgraded the GDP growth projection for FY20 to 6.1% from earlier 6.9%.
On the face of it, the 0.25% repo rate cut is positive for interest-sensitive sectors, excluding financials. With the likely greater-than-expected policy-rate cut and the RBI’s resolve to ensure the transmission of policy rates to lending rates, we expect interest-sensitive sectors such as auto, capital goods and consumer durables to be positively impacted, say Sujan Hajra and Yuvraj Choudhari of Anand Rathi Share and Stock Brokers.
“With the pressures to transmit policy-rate cuts, low system credit growth and unfavourable developments in the financial sector (cooperative banks, select NBFCs, and private banks), financials may not do so well. Yet, the increase in lending limits for NBFC-MFI would positively impact these companies. A deeper rate cut would build pressures on the rupee to depreciate, which would help IT companies,” the experts said.
The impact on bonds
Post policy the 10-year G-sec was up by 5 bps. The 1-year yield was up 1 bps, 5-year was down 3 bps, 15-year was flat, and 30-year was up by 1 bps. One bps is 0.01%.
Despite a rate cut and a dovish statement, the bond market seems to be disappointed as there was some hope of a deeper rate cut in this policy itself and a much more aggressive tone from the RBI Governor.
“From a long term perspective, we believe that the best in the bond market is now behind us. Nevertheless, from short term tactical perspective we do see value in long (term) bonds at current levels and expect yields to come down in the coming months as the market starts pricing for more rate cuts and potential OMOs,” says Pankaj Pathak, Fund Manager – Fixed Income, Quantum Mutual Fund.
Given the likelihood of excess liquidity conditions, investors in the money market, overnight and liquid funds should also expect lower returns as money market yields will fall with a reduction in the repo rate, added Pathak.