As expected on August 2, in the third bi-monthly monetary policy statement, the Reserve Bank of India cut the policy rate by 25 basis points (bps) from 6.25% to 6%. One basis point is one-hundredth of a percentage point. A look at what the policy announcement means for your money and what you should do.
Lending, deposit rate
The RBI seems to be unhappy with the current benchmark lending rate — marginal cost of funds-based lending rate (MCLR). During the policy announcement, RBI deputy governor Viral Acharya said, “The experience with the MCLR system introduced in April 2016 for improving monetary transmission has not been entirely satisfactory even though it has been an advance over the earlier base rate system.”
The central bank is all set to review this.
This is not the first time that the RBI is considering a review. All floating rate loans taken after April 2016 are linked to MCLR. Prior to MCLR, floating rate loans were linked to the base rate and before that to benchmark prime lending rate. There is a possibility that borrowers will soon see a new benchmark lending rate that will replace MCLR. However, this won’t happen immediately.
But what does a 25 bps cut mean for your existing floating rate loans on MCLR? “From a broader perspective, this 25 bps cut has already been priced in. Because if you look at the way banks have moved their deposit and lending rates, banks in a way have priced in this drop. There may be a marginal movement but I won’t expect any major movement,” said Shanti Ekambaram, president-consumer banking, Kotak Mahindra Bank Ltd. Analysts say that banks are likely to cut lending rates linked to MCLR further. If you are looking to take a home loan, compare rates in the market and also factor in other charges linked to the loans.
Meanwhile, banks have been cutting deposit rates. Recently, SBI cut savings account deposit rate to 3.50% per annum. Banks including ICICI Bank Ltd and Lakshmi Vilas Bank have cut fixed deposit rates.
“Banks have been dropping deposit rates, if you see in the last few months. Liquidity and demand supply will be the major factors that will come into play,” said Ekambaram. You can expect further cuts in fixed deposit rates.
Mutual funds as well as debt funds have been factoring in this rate cut too. People investing now would do well to focus on short-term funds, according to Lakshmi Iyer, chief investment officer – debt, and head of products, Kotak Mahindra Asset Management Co. Ltd. But don’t expect high returns from liquid funds. “Expecting high returns from duration funds from here on may not be a good idea. Steady returns from income-accrual funds is the way to go,” said Vidya Bala, head of mutual fund research, Fundsindia.com.