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The Reserve Bank of India (RBI) held its bi-monthly monetary policy review on August 6, 2021. In the meeting, RBI announced that it has decided to keep key policy rates unchanged. The repo rate and reverse rate remain at 4% and 3.5% respectively. As a result, banks will most likely not increase interest rates on loans, and borrowers can enjoy the benefit of low-interest rates in the near future.
This is the eighth consecutive time that the RBI has left the repo rates unchanged. The last reduction in the repo rate took place in May 2020. Notably, the repo rate of 4% is the lowest it has ever been since April 2001. An unchanged repo rate means that banks are not likely to hike up interest rates.
What Is The Repo Rate And Why Does It Matter?
What’s the repo rate and why does it influence the interest rates on your home or car loan? Basically, when banks are faced with a cash crunch, they borrow money from the Central bank of our country, the RBI. The repo rate is simply the interest rate at which banks can borrow money from the RBI. The repo rate represents the cost of borrowing money for banks.
If borrowing is costly for the banks, it will naturally be costlier for banks to lend that money to you. That’s why a higher repo rate directly leads to a higher interest rate on your loans. Since the RBI has decided not to increase the repo rate, banks don’t need to increase the interest rates on the loans they provide to you.
As an aside, the repo rate is also the way that the RBI exerts a degree of control over the Indian economy. When inflation is high, for example, RBI can increase the repo rate. This will increase the cost of borrowing for everyone, so the availability of cash in the market will decrease, keeping inflation in check.
How New Borrowers Can Take Advantage
Whether you’re considering a home loan, a car loan, or a personal loan, this is a good time to take the leap. There are just a few things you should look out for:
a. A Good Credit Score
This is especially important for personal loans, but also relevant generally: maintain a good credit score. It will ensure that you’re able to get the lowest interest rates possible. No matter how low the repo rate, a bad credit score will make it harder to get low-interest loans.
b. Fixed vs Floating Rate
When taking a loan, you need to understand the difference between fixed and floating interest rates. A fixed-rate is when your interest rate is fixed for your tenure. It’s a popular option for car and personal loans. Right now is a good time to get a low fixed rate that will remain for the tenure of your loan.
In case of a home loan, banks will mostly offer floating rates. An External Benchmark Rate (EBR), which depends on the repo rate, is a good option. That means that your interest rate will be linked to the repo rate. With an EBR, you can take full advantage of the low repo rates in the near future.
How Existing Borrowers Can Avoid High-Interest Rates
The fact that the repo rate has been at its lowest in the last two decades is significant news for existing borrowers. It could mean that you need to consider shifting your loans to a different lender for lower interest rates. Here’s what you should do based on the type of loan you have:
a. Home Loans
Since home loans are some of the longest tenure loans available, they are given on a floating rate basis. As an existing borrower, you need to ensure that your interest rate is based on an external benchmark like the repo rate.
If not, you could be paying a much higher interest rate than you need to. You can ask to be shifted to an external benchmark rate (EBR), whether with your current lender or a new one. You might have to pay a nominal switching fee. According to experts, you should consider switching your lender if your interest rate could be reduced by at least 0.5%.
b. Car Loans
Car loans are usually given for no more than a 5 to 7 year period. Here’s how you can utilize the low repo rate in that scenario. If you took out your car loan two years ago, and find current interest rates to be much lower, there’s no need to worry. If your foreclosure rate is low, you can switch to a different lender with a lower interest rate.
c. Personal Loans
If you have an existing personal loan, you’re also dealing with a fixed interest rate. If you’re paying a much higher interest rate, however, (more than 16%) then you could check the rates of other lenders. Personal loans are for short tenures, typically 3-5 years, so switching to lower rates in the first half of the repayment period can save you quite a bit.
Thus the decision to not increase the repo rate brings good news to borrowers, particularly retail borrowers.