Know the impact on loans and deposits!

RBI

MAIN ELEMENTS

  1. With the RBI maintaining the status quo, banks are unlikely to raise lending rates in the near future.
  2. Without raising the repo rate, a new borrower planning to take out a home loan in the near future can borrow at the current low interest rates for a while longer.
  3. The higher your credit score, the better your chances of getting a loan at a good interest rate.

As widely expected, the Reserve Bank on Friday kept key interest rates unchanged at the first bi-monthly monetary policy meeting of this fiscal year. While the RBI move may please borrowers as they currently pay the lowest interest rates in more than two decades, investors and depositors have reason to be cautious.

The six-member RBI interest rate committee maintained the status quo interest rate repo and a reverse repurchase rate of 4% and 3.35%, respectively. It has been more than 22 months since the last change in the repurchase rate, when it fell to 4 percent on May 22, 2020, which is the lowest rate since April 2001.

Here’s what is likely to happen with FD interest rates and what depositors should do. In addition, we also tell you what borrowers should expect.

Short-term deposit rates may rise first

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Whenever the interest rate cycle turns upside down, it is usually the short to medium term interest rates that are likely to rise first. As for long-term interest rates, it will take a little longer for them to rise significantly.

Locking long-term deposits with a lower interest rate

If you are planning to buy an FD now or want to renew your existing FD, then it would be best to go for a shorter FD, say a year or less, so that your deposit is not locked in at a lower interest rate for a long time. Each time the short-term to medium-term interest rates rise, you can start increasing the FD term accordingly.

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Impact on borrowers

With the RBI maintaining the status quo, banks are unlikely to raise lending rates in the near future. However, the low interest rate regime may not last long. Here’s a look at how existing borrowers and those who want to get a new loan (whether it is a mortgage, car loanthe personal loan) can take advantage of the RBI cessation.

Mortgage borrowers

As the repurchase rate is at the lowest level of the last two decades, the continuation of the low interest rate regime is positively predicted for the borrowers.

Without raising the repo rate, a new borrower planning to take out a home loan in the near future can take out the low interest rates for a while longer.

Existing borrowers need to reconsider and take action: No change in the repurchase rate means that existing mortgage borrowers will continue to pay their EMIs at the same rate.

Car loans

The maximum term of a car loan is between 5 years and 7 years. Depending on whether you are planning to get a new loan or are already a borrower, you can use this pause in the repurchase rate to your advantage.

Most car loans are still financed at a fixed interest rate, meaning that whatever interest rate you receive at the time of the loan will remain fixed throughout the term of the loan. Therefore, when one takes out a loan it becomes crucial.

Personal loan

New borrowers should use an extra window: And in the case of personal loans, banks are unlikely to raise interest rates any time soon. Therefore, if you are planning to take out a personal loan, make sure you have your credit score with you so that you can check the best interest rate based on your credit score. The higher your credit score, the better your chances of getting a loan at a good interest rate.

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