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Repo rate-linked loan EMIs will be reduced immediately, within about a month, but MCLR-linked loans could take at least two quarter before EMIs get cheaper, say experts.
Though most loans have already been converted to the repo-linked regime, there are a few ones that still need conversion for the rate cut benefit.
As the RBI MPC cut the interest rates by 25 basis points (bps) last week, the move is expected to provide a much-needed relief to borrowers, both new and existing borrowers. The cut in the repo rate might lead to a reduction in the loan EMI amount or EMI duration for the floating interest rate-based home loans, auto loans, or personal loans. Though most loans have already been converted to the repo-linked regime, there are a few ones that still need conversion for the rate cut benefit.
As far as the new borrowers are concerned, they will be able to get the lower interest rates on loans after a few weeks.
When Will Your EMI Get Cheaper?
The interest rates on the loans that are linked with external benchmarks, like the repo rate, will be reduced immediately, within about a month. However, MCLR-linked loans could take at least two quarter before EMIs get cheaper.
After the RBI rate cut, RBI Deputy Governor Swaminathan J said, “We will see an immediate impact on loans linked to external benchmarks. In loans linked to MCLR, it will take two quarters for the effect to play out.”
He further added, “The existing deposits will be carried on the contracted rate; only the new deposits will see changes. So, monetary policy transmission to deposit rates will also take about two quarters.”
MCLR-linked loans are influenced by a bank’s cost of funds, deposit rates, and operational expenses, making the transmission process slower. Also, these loans typically have a six-month reset period, meaning that revised rates may only take effect next year.
Shivaji Thapliyal, head of research at Yes Securities, as quoted as saying by India Today: “Banks will reprice repo rate-linked loans lower by 25 bps immediately or in the near term. However, they will manage net interest margins through various levers, including MCLR repricing.”
What Should You Do?
It is important to know that these are floating interest rate-based loans that will see EMI reduction. However, EMI on loans that were taken on the fixed rate regime will not see any change.
Banks also offer option to borrowers to switch from base rate-linked loans to floating interest rate loans.
HDFC Life Insurance Chairman Keki Mistry said, “Most loans have already been converted to the repo rate regime. There are very few loans that are based on old benchmark (fixed regime).”
How Much Will You Save From Cheaper EMIs?
Let’s look at an example. Say you have a home loan of Rs 50 lakh at an interest rate of 8.5% for a tenure of 20 years. With the 25 basis points rate cut, your interest rate would drop to 8.25%. Here’s how that impacts your monthly EMI:
- Old EMI (at 8.5%): Rs 43,059
- New EMI (at 8.25%): Rs 42,452
So, you save about Rs 607 every month. Over the course of a year, that’s a savings of Rs 7,284!
Caveat: This is just a rough estimate. The final EMI savings will be known only after your bank takes a decision on EMI loan rate cuts. Your loan interest rate comprises two things — MCLR and spread. Though MCLR will be reduced after the repo rate cut by the RBI, the spread depends upon banks. It depends upon the quantum of interest rate cut transmission to customers.
Repo Rate Cut: Will RBI Reduce Interest Rates Further?
This is the first interest rate cut by the RBI since Covid times (May 2020). After the latest cut, the repo rate (the interest rate at which the RBI gives loan to banks) stands at 6.25 per cent, down from 6.50 per cent earlier.
Between May 2020 and April 2022, the RBI kept the repo rate unchanged at 4 per cent. It then started hiking the policy rates since April 2022 and gradually raised to 6.5 per cent till February 2023 before keeping it unchanged for two years until now.
According to analysts, rate cut cycle has been started with the RBI most probably cutting interest rates in future policy reviews. However, it also depends upon the macroeconomic factors, like inflation, growth and global factors, as the RBI’s monetary policy stance remains ‘neutral’.
