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Tata Capital > Blog > Post the Populous Budget, RBI Gifts an Interest Rate Cut to Boost Loan Demand, Consumption

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Post the Populous Budget, RBI Gifts an Interest Rate Cut to Boost Loan Demand, Consumption

Post the Populous Budget, RBI Gifts an Interest Rate Cut to Boost Loan Demand, Consumption

After the government gave a much needed boost to the economy during the Budget announcement, the Reserve Bank of India (RBI), under new leadership, on Thursday announced an interest rate cut of 0.25% or 25 basis points. The change of policy stance from ‘calibrated tightening’ to ‘neutral’ – the first interest rate cut since August 2017 – is a welcome move from the new RBI governor Shaktikanta Das. With the rate cut, borrowers can get access to cheaper loans, which should boost the demand for white goods as well.

Home loans, car loans to be cheaper – In a borrower-friendly move, the RBI has reduced the benchmark policy interest rate by 25 basis points (1 basis point = 0.01%). The repo rate at which banks borrow from the central bank now stands at 6.25 per cent from 6.5 per cent. Repo rate is the rate of interest at which banks borrow money from the RBI. As and when the RBI cuts the repo rate, there is money available with banks at a lesser cost. This means banks will be able to borrow at lower cost and so they will pass on the benefits to you i.e. borrowers.

An interest rate cut will lower your total loan interest outgo. A 25 bps rate cut on a 20-year home loan of Rs 40 lakh taken at 8.85% will bring down the interest payable from Rs 45.4 lakh to Rs 43.9 lakh at 8.6% (8.85% drops to 8.60%). This means there will be an interest savings of Rs 1.5 lakh over the whole loan tenure. This could mean that home and auto loan EMIs may become to become cheaper by say Rs 600-700 per month.

This, coupled with the interim 2019 budget proposal scrapping tax from notional rent on second self-occupied property could reinvigorate the sluggish property sector as well. The budget also enabled the capital gains to be invested in two houses instead of one. So, this additional home loan interest rate cut will further sweeten the appeal of investing in real estate.

More rate cuts could happen in future – The demand for loans is expected to remain good. The RBI has indicated that the latest interest rate cut may just be the start of a rate-cutting cycle. This is because inflation is already lower. If inflation falls further, interest rate can go down further. 

Lowering of inflation estimates has signalled supportive RBI policy of further rate cuts. The next RBI policy is in April. Many expect another rate cut of 25 bps, if inflation remains under control. The RBI governor has reiterated that all decisions will be driven by data. The transmission of this rate cut, and the future rate cuts, should reduce the borrowing costs of retail borrowers, MSMEs and corporates. This would help boost both private capital expenditure and private consumption. In this way, demand for housing, cars, travel, industry and consumption will be boosted.

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