What Does Repo Rate Cut Mean for Common Public?

20 Oct 2020 5 min read
News: What Does Repo Rate Cut Mean for Common Public? - Afinoz

The Reserve Bank of India today announced a slew of measures to counter the economic impact of the coronavirus pandemic. Here are some of the key points from the RBI’s announcements: 

  • Deferral of loan payments will not be considered as defaults, hence there will be no impact credit history of borrowers.
  • Repo rate has been cut by 75 basis points to 4.4% from 5.15%.
  • The reverse repo rate has been reduced by 90 basis points to 4%.  

These announcements will provide a great relief to a personal loan, home loan and car loan borrowers. With this reduction in lending rates, interest rates applicable on loans, including personal loans, home loans and car loans, are expected to fall further. This rate cut will have a direct impact on your savings. Let’s understand how the reduction in repo rate impacts you.

What is the repo rate?

Repo rate refers to the rate at which the central bank of a country, in this case, Reserve Bank of India, lends money to commercial banks in the country. Reduction in repo rate means other banks can borrow money from RBI at lower interest rates. 

Usually, commercial banks pass on the benefits of the rate cut to their customers by cutting the interest rates applicable to loans. That is why whenever the repo rate increases or decreases, interest rates applicable on bank loans also increase or decrease accordingly. 

Reduced repo rate means lower interest rates, as well as lower EMI for bank loans. As a result, the overall cost of the credit comes down and your savings increases. 

Impact of rate cut on your savings

Let’s take an example to understand how you can save a lot of money with a reduction in the repo rate. For example, in December 2019, Mr Ajeet availed a personal loan of Rs. 10 lakh for 5 years at the rate of interest of 11.75% per annum from a lender. Which means, Ajeet has been paying Rs. 22,118 per month as an EMI towards his personal loan. Ajeet will be paying a total interest of approximately Rs. 3,27,099 for the entire tenure. 

Personal loan after the latest rate cut

After the latest reduction in repo rate, many lenders decide to bring down the interest rates, let’s assume by 50 basis points (bps), from April 2020. Let’s suppose, in April 2020, Ajeet’s friend Saurabh decides to apply for a personal loan from the same lender where Ajeet got his personal loan from. Now with the rate cut, Saurabh gets a personal loan of the same amount (Rs. 10 lakh) for the same tenure (5 years) at the rate of interest of 11.25% per annum. Which means, Saurabh will pay a monthly instalment of Rs. 21,867 to repay his personal loan. Therefore, Saurabh will be paying a total interest of approximately Rs. 3,12,038 for the entire loan tenure. Which means Saurabh will save around Rs. 15,061. Bigger loan amount means greater savings. 

Illustration

 

Loan amount

Interest

Tenure

EMI

Total interest payable

Before rate cut

Rs. 10 lakh

11.75%

5 years

Rs. 22,118

Rs. 3,27,099

After rate cut

Rs. 10 lakh

11.25%

5 years

Rs. 21,867

Rs. 3,12,038

Total savings 

                        Rs. 15,061

It is apparent that every time repo rate reduces, your savings increase. Moreover, along with a reduction in interest rates, a monthly instalment towards loans also decreases. However, this is possible only if lenders like banks and NBFCs (Non-Banking Financial Companies) decide to pass on the benefits of reduced repo rate to their customers. By how many basis points (bps) a bank reduces the rates depend on the bank’s internal policy.  

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