India's Monetary Policy Committee (MPC) of Reserve Bank on Wednesday cut repo rates by 25 basis points (bps) to 6 percent, lowest in the last seven years, but home loans Equated Monthly Installments (EMI) won't be slashed.
One basis point is one-hundredth of a percentage. Repo rate is the rate at which RBI lends to its banks.
Following the decision, the benchmark repo rate stands reduced to 6 percent from 6.25 percent earlier. Accordingly, the reverse repo rate has been pegged down to 5.75 percent from previous 6 percent.
Now the biggest question is will banks slash home loan interest rate?
"Most unlikely," said a public sector bank official speaking to IBT. "Currently the overall demand for loans is at the lowest. Banks can't show loan growth for several quarters now," he said.
After the 25bps cut in the lending rate by the central bank, the cost of funds for the banking system is expected to come down further. The home loan borrowers should, therefore, get the advantage of lower EMIs.
To this argument, the banker said, "Absolutely correct. But the real estate industry is going through terrible times. If there is no demand for loan, it's mostly unlikely for the bank to slash rates," he said.
Moreover, those having MCLR based home loans, i.e. borrowed after April 1, 2016, or shifted from the base rate, the falling MCLR has helped. But, unlike in the base rate era, the benefit of falling MCLR is not that immediate in the present regime. This is because, for most MCLR-linked home loan contracts, the banks reset the interest rate after 12 months for their home loan borrowers, ET reported.
Under MCLR based lending, do not, therefore, expect the EMIs to fall every time RBI cuts repo rate.
