Home loan borrowers should track repo rate movements

 Any home loan borrower should keep a track of the fluctuations in repo rates. In the past few months the Reserve Bank of India (RBI) has reduced the repo rates which have further decreased the interest on home loans.

With the repo rates being lowered the cost of funds for banks is reduced which eventually drops the interest rates on home loan.

What is a repo rate?

A repo rate is the short-range lending rate on which the RBI prolongs short-term loans to the banks. This rate is one of the key factors which decides a bank’s lending rate. A repo rate is also known as the Indian interest rate. In case a bank is short of funds, the bank can borrow rupees from the Reserve Bank of India (RBI) at the repo rate and the interest rate with one day maturity. However if the central bank of India prefers to put more money in to circulation, the RBI will lower the repo rates. Otherwise the reverse repo rate is the interest rate which the banks receive when they deposit money with the central bank. A reverse repo rate is always lower than a repo rate. Any changes in the repo rate will eventually effect the interest rate on the banking products like savings, mortgages and loans.

The role of repo rates:

With the decrease in the repo rates the rates on new loans have fallen more than the interest rates on the existing loans, the reason being the new accounts viewed as fresh sales. Perhaps banks offer many promotional schemes and go aggressive on the rates. However, the rate cut is applied only on the existing loans when banks are satisfied with their overall cost of funds and are confident about maintaining their net interest margins.

The stance of repo rates:

Very often the interest rates follow a cyclic pattern and in the year 2007-2008, the interest rates were at lower levels. Due to the inflation rates, the RBI started shrinking the monetary policy in order to moderate the impact on inflation. Comparatively, the interest rates have scaled significantly because of the RBI’s monetary shrinking in the past few years. This has affected the economic growth and the borrowers’ confidence.

The RBI has softened its monetary policy because there was a drop in inflation rate. Also the RBI responded by reducing the repo rate as well as the cash reserve ratio (CRR). However the slowdown of the economic growth is quite a concern, the future monetary easing will depend on the inflation rate.

Tactics for a home loan borrower:

Most of the banks have come up with different ways of attracting customers. Few of the ways like a profound reduction of the rates and attractive schemes have been practised by most banks as the reduction in repo rate has ultimately brought down the cost of funds with the CRR cut causing more liquidity among banks.

• It is very important that the home loan borrowers should prefer good bargains on interest rates along with upfront processing fee and other charges.

• It is predicted that there will not be any further rate cuts hence making this time as a perfect one to invest in any property with a home loan based on floating interest rate.

Here is a table representing the changed repo rates for the past few years: