Surprise repo rate cut: How it impacts you?

Nitin VyakaranamArthayantra.comGlobal markets are volatile and at this situation RBI made a surprise move by reducing the repo rate by 50 basis points to 6.75%. This has given a new ray of hope to Indian markets for next quarter. Repo rate cut has a positive impact on loan interest rates as major banks reduced the home loan interest rate by 40 basis points. On the other side, it has a negative impact on people investing in fixed income securities like fixed deposits, recurring deposits as they may not receive expected interest rates and thus end up with low post tax returns. With both merits and demerits with repo rate cut, it is important for an individual to look at this change from his perspective and take profitable measures. We look at the impact of this change from the perspectives of borrowers and investors. Existing Borrowers:Interest rate cut by the banks would benefit the existing home loan borrower as the EMI would get reduced. For example: An individual paying an EMI of INR 19,300 (Loan – 20 lakhs, Term – 20 years, ROI – 10%) could save as much as INR 530 every month on post interest rate revision and the amount he will save by end of loan tenure is INR 1,20,840 (assuming the loan is one year old). An individual can avail the benefit by either reducing the EMI or by reducing the loan tenure by paying the same EMI, in this case loan can be repaid 15 months before the maturity date (assuming the loan is one year old). After considering these both options, it is an ideal time for an individual to check with banker for revision of EMI or tenure. If revision is not encouraged by your banker you always have an option to refinance the home loan from another lender at a lower interest rate. However, borrowers should go for re-financing option only they have taken loan recently. This is because banks will consider major portion of EMI paid into interest during initial years. Additionally, they should also check processing charges for re-financing before choosing this option. So, it is time to have a review call with your banker and take a right decision that help you save good amount.New Borrowers:It is the right time for a new home loan borrower to approach those banks who are offering home loans at lower interest rates. By choosing a low cost option will leave them with higher disposable income and thus lead to better savings. To utilize this opportunity one should do comprehensive analysis on comparing the interest rates, loan tenure of different banks. A professional financial advisor can help you in choosing the better option by considering all pros and cons of the given situation. Existing Investors:Repo rate cut will have negative impact on Fixed Deposit (FD’s) and Recurring Deposit (RD’s) investors because they may receive low return on investment. To make good returns in spite of repo rate cut, it is important for an individual to review existing investments in these fixed income assets to identify the low yielding assets and rebalance the portfolio accordingly. Asset allocation varies from individual to individual because the investment decision depends upon individual’s financial goals and time required to achieve those goals. Our experience tells us that for short-term investment horizon, debt funds would yield good returns as the rate cut would have positive impact on their growth. For medium-term investment horizon, fixed maturity plans (FMP’s) and income funds would perform well. For long-term investment horizon, it is advisable to have an equity exposure. New Investors:Markets have been volatile and this repo rate cut may have a positive impact on Indian markets. On this note new investors who have been struggling hard to figure out where to invest money due to fear of losing money in volatile markets can now re-think on taking a step forward towards investments. However, it is important to identify right investment avenues which help them to achieve their investment objective. Conclusion:This surprise move by RBI made interest rates low as much as they were in October 2011 and we may not see any surprise rate cut by RBI in near future. So, this is the right time for individuals to think and take a wise step in their personal financial life.