RBI repo rates: What is the impact of low interest rates? Know better return options from bank FD and more

The Reserve Bank of India (RBI) has maintained the status quo on repo rates for the 9th time. How it will affect your EMI and how you can benefit from it? 

In yet another episode of Money Guru, Zee Business' Swati Raina spoke to Harshvardhan Roongta, Certified Financial Planner at Roongta Securities, about the benefits of low interest rates, and better returns from bank fixed deposit.  

Responding to this, he said, "RBI can clearly see the pressure of inflation, which is above its comfort zone. So, to control the money supply, RBI has maintained the status quo in the repo rates. The current repo rate is 4 per cent, and the reverse repo rate is still at 3.35 per cent. This is because the market hasn't attained normalcy in the money supply. However, we can witness a change in the repo rate in the future." 
 

RBI controls money supply through repo rates 

Explaining what repo rate is and its impact on common public, Roongta said, "Commercial banks borrow money from RBI, and then lend the same money to consumers. Repo rate is the rate at which RBI lends the money to commercial banks, and that money is then lent to the consumers. If RBI has control money supply in the market, RBI may increase the repo rate, which will lower the loan availed by the banks because of increased lending rates. And when RBI wants the money to be circulated in the market, it decreases the repo rate to control the money supply in the market. Nonetheless, that is how economy activities pick up." 

"RBI controls the money supply through repo rates," he added. 

Repo Rates linked with MCLR 

Elucidating on the relation between repo rates and EMI, Roongta said, "As of now, there haven't been any changes made in the repo rates, MCLR (Marginal Cost of Funds based Lending Rate) has been now linked to the repo rates. RBI took this step to translate the benefits of an unchanged repo rate for the borrowers. The formula of MCLR is dependent on the repo rates. So, repo rates play a key role, apart from other factors in determining the interest rates." 

According to Roongta, even though home loan has seen the most volatile rates, it will remain unaffected due to the constant repo rates unless the next policy brings any changes. Also, automobile sector loans don't often see volatility in interest rates. 

Low-interest rates can increase Capex

Explaining the overall impact, he said, "If we look at the impact of repo rates, it seems to be a cycle. Borrowers of home loans, auto loans will get loans at low-interest rates, leading to more buying due to increased affordability. Due to this, the sector affected will manufacture more, sell more and leading to increasing CapEx (Capital Expenditure). And increased CapEx leads to more employment rates, more growth rates. Hence, lower interest rates can trigger the economic cycle." 

Impact on EMI

"Principal amount and interest are two components of any loan. A lower interest rate will enable the borrower to repay the loan in less time, increasing the repayment rate. Also, decreased interest rates can lessen the original tenure of loan repayment," Roongta added.  

Is bank FD still the better option? 

Talking about better investment scopes, Roongta said, "Bank FD is a segment where you get 5-6.5 per cent, looking at it independently, it is taxable. So, looking at it purely from the return point of view, it wouldn't beat inflation. And if you are not able to lower the inflation, that means you are not earning anything through your money, which will lead to decreasing purchasing power." 

He said that the people would have to look for other similar saving schemes, giving a better return.  

Here are some of the investments that Roongta suggested: 

• Special Deposit Scheme (SDS) 
• Pradhan Mantri Vaya Vandana Yojana (PMVVY)  
• Senior Citizen Savings Scheme (SCSS) 
• Post Office Saving Schemes 
• Equity Investments 

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"FD or primarily debt investors should add growth assets to their portfolio to increase the weighted average return," Roongta added. 

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According to Roongta, HDFC Limited and Bajaj Finance have increased the deposit interest rates to 10-30 bps (basis points), which gives the possibility that interest rates may increase with the next financial year. This also indicates that the liquidity situation is normalizing in the country now.