Usually, the repo rate serves as an effective way of regulating money supply in the national market. It is thus an effective monetary policy tool that the RBI tends to utilise, increasing or decreasing the rate based on the prevailing economic conditions. For instance, in May 2020, the Reserve Bank of India had slashed the repo rate by a sharp 40 bps to adjust the same at 4%.
In the latest RBI’s Monetary Policy of 2020, the regulatory body decided to implement no changes to it, keeping the current repo rate at 4%. The decision has had a massive impact on the flow of money and liquidity in the market, which in turn has impacted the financing decisions of many concerning borrowing and investments.
Impact of repo rate cuts on investments
You must note that slashing repo rates is an effective way of pumping funds in the market to boost economic growth and improve existing liquidity.
Such a decision has a direct impact on borrowers and investors as it makes the overall process of borrowing credit more feasible. It is because the businesses can access credit at cheaper rates, which also facilitates more borrowings and in turn, increases consumption demand in the economy.
Take a look at these following to gain a better understanding of the impact of these rate cuts on borrowers and depositors.
Individuals who have parked their money into a savings account or have invested in fixed deposits or any other banking-related investment tools are likely to bear the brunt of rate cuts. It is because lowering the current repo rate will further reduce the interest earnings on deposits.
Regardless, to make the most of the prevailing situation, one may consider investing in safer instruments and diversify his/her portfolio for higher returns. One may consider investment options like PPF, Sukanya Samriddhi Scheme, SCSS, etc. for the purpose.
Other than that, conservative investors may look for financial institutions that extend fixed deposit schemes at an attractive rate of interest to align their investment endeavour as per the RBI’s repo rate cut.
The recent key lending rate cuts have been received positively by borrowers availing financing options like a home loan, business loan, car loan, etc. It is because a reduction in the repo rate leads to a substantial decrease in the loan EMI burden as well. However, one must note that the impact of rate cuts will be relatively quick for repo rate-linked loans.
Since repo rate-linked lending rate (RLLR) is an external benchmark, the interest rates get adjusted within 3 months of every change in this key lending rate. In case your loan is linked with MCLR, make sure to know about MCLR-based home loans and the impact of repo cuts in detail to align your repayments accordingly.
Above all, individuals who have been planning to avail a housing loan can make the most of the prevailing repo rate and apply for a housing credit to fulfil their house purchase plans. Nevertheless, to maximise the benefits, individuals should pick a financial institution that extends substantial loan value against attractive rates of interest. Also, simple terms of repayment will further make the entire funding easy to manage.
Typically, lending institutions might offer attractive pre-approved offers to customers to make the process of applying for financial products less cumbersome. Such offers apply to several financial products, including home loans and loans against property. You can check your pre-approved offer online now by entering just your name and contact details.
Existing borrowers can also benefit from this situation if they plan to reduce EMIs with a home loan balance transfer. Nevertheless, they should keep track of a few things before proceeding to initiate a loan balance transfer.
For instance, they should check these following things about balance transfer in advance to maximise benefits from this facility –
- Compare interest rates and terms of service before selecting a new lender.
- Check the eligibility criteria and other requirements before applying for a balance transfer.
- Confirm the steps involved in application, documentation and verification process.
- Also check the accompanying fees and penalty (if any).
Therefore, it can be said that changes in the repo rate tend to leave a significant impact on investments. Regardless, individuals should also make it a point to find out the effect of reverse repo rate on investment so that they can develop suitable investment strategies for suitable earnings.