RBI Repo Rate Cut: Interest Rates On Loans Will Lower, But Gradually

The Reserve Bank of India Monetary Policy Committee, under new Governor Sanjay Malhotra, decided to cut the repo rate by 25 basis points to 6.25% on Friday. The repo rate has a direct impact on interest rates of loans. But the impact of this cut may not be immediate.

RBI Governor Malhotra said that bank liquidity buffers are sufficient. The liquidity deficit was due to advance tax payments. Some banks are hesitant to on-lend in the un-collateralised call money market. Banks are passively parking funds with the RBI. Malhotra urged lenders to trade among themselves in call money market.

A lower repo rate makes borrowing cheaper as the banks can borrow money at a lower rate from the central bank. This means that with the lower interest rates from the RBI, banks will have lower interest rates on loans as well. But the benefits of this may not be felt anytime soon.

Interest Rates On Loans

"This is a long awaited rate cut after five years. The direct impact for consumers of lower interest rates will be gradual. Even though the market had already factored in the rate cuts, the lowering of interest rates will come in the coming quarters," said Mohit Gang, co-founder of Moneyfront.

With this impact being coupled with the great budget that boosted consumption, there will now be more money in the hands of the people, he noted. This will also help ease the household balance sheets more, given inflows and more money that they can spend, he added.

Further, the impact may not be immediate as the lower rate benefit will trickle down only in the coming quarters, Gang said.

"Under this new system, where loan interest rates are linked to the repo rate. The rate will be applicable in the next reset period," said Arnav Pandya, founder of Moneyeduschool.

The rates will go down but it will apply according to your lenders and loan condition, he said. This reset period could be every quarter or six-months, depending on the lender and the conditions of the loan.

On FD Rates

Further, the RBI repo rates also act as a signal for the fixed deposit interest rates as well. FD rates, like the loan interests, will only see a watered down effect of the repo rate cut.

"Fixed deposit rates will not go down immediately, due to the liquidity problem in the system. The banks still want deposits to come in. One more rate cut will bring down rates, but I don't expect another rate cut," Pandya said. This means that another rate cut may have a more sharper impact on FD rates, when compared to interest on loans.