Rejoice borrowers! RBI turns savior by opting for status quo; This is how a rate hike would have impacted you

Today, the financial sector was left shaken and that too by something that effectively, turned into a non-event. Of all things, it was an announcement to retain the status quo!  Quite interestingly, the Reserve Bank of India (RBI) shocked markets and experts by opting for 'wait and watch' option, rather than hiking policy repo rate. This of course was not taken well by investors as Sensex and Nifty 50 shed plenty blood by tumbling by as much as 900 points and 300 points respectively at one time. Meanwhile, Indian rupee too showed its disappointment over RBI's decision by plunging to an all-time low of over 74-mark against US dollar benchmark. Few economists and expert also mentioned that keeping policy repo rate unchanged at 6.50% was one risky move. But guess what! You borrowers can rejoice over the fourth bi-monthly monetary policy outcome for FY19. RBI has become a savior for borrowers as a rate hike would have led to an increase in lending rates of home loans, vehicle loans and personal loans, which would hit EMIs too. 

So, now, India's policy repo rate stays at 6.50%. Consequently, the reverse repo rate under the LAF remains at 6.25%, and the marginal standing facility (MSF) rate and the Bank Rate at 6.75%.

B. Prasanna, Group Executive and Head – Global Markets Group, ICICI Bank said, "In an unexpected move the MPC left repo rates unchanged citing a benign inflation trajectory and a downward revision to the inflation expectation one year ahead. It has also possibly taken into account a subtle concern on a possible growth slowdown in the economy on account of several headwinds, including high oil prices, volatile global financial markets, intensifying trade wars and growing uncertainty in the domestic financial landscape." 

Interestingly, Adhil Shetty, Co-founder and CEO, BankBazaar.com laid out what the impact of an actual rate hike would have been on borrowers! Lesson? RBI choice of status quo is the best thing to happen to them short of an interest rate cut. 

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Fixed deposits

A status quo in the policy rates means that deposit rates would stabilise or marginally increase. 

Shetty said, "We have recently seen interest rates of small savings schemes for the current quarter go up by 30-40bps."

This increase will contribute to driving up the interest rates on bank fixed deposits as well. 

So, if you are looking for assured returns and safety of capital, small savings are becoming more attractive.

Loans

Though RBI has maintained its stance, some major banks have revised their rates, and more may follow. 

In such a scenario, your best plan is to try and prepay your loans in part or full. 

Even a small change in interest rates can have significant impact on your loans, especially in case of long-term loans like home loans, and even a small prepayment can help in a big way.

For instance, if you have a loan of Rs 40L for 20 years at 8.75, your total payable amount would be Rs 84.8L. At the end of three years, your outstanding balance is Rs 37.5L. 

Assume you repay roughly 10% or Rs 3.5L, your outstanding amount comes down to Rs 33.86L. Even with a 25 pbs hike in interest rate, your total outflow would be lower.

It needs to be noted that, rate hike dilemma has not ended, as MPC members have changed India's policy stance to ‘Calibrated Tightening’ from previous 'neutral'. 

In this regards, Abheek Barua, Chief Economist, HDFC Bank said,"This is a risky move by the RBI since the market was positioned for a rate hike, purely as a rupee defence. In its absence currency and asset markets could see sharper corrections. A narrow focus on inflation targets perhaps not desirable in the middle of a financial crisis. Change in stance suggests that the rate hike could still come in the coming months.