06 Nov 2015

Pratik Bhartia

RBI Rate Cut – What does it mean for you

In its latest policy review, the reserve bank of India, in a surprize move, reduced

the Repo rates by 50 basis points (0.5%). The current repo rate stands at 6.75%,

down from 7.25%. The market expections were more for a rate cut to the tune of

25 basis points.

The move has been met with cheer and the stock market reacted positively, with

the sensex jumping over 400 points during the day and finally closing 162 points

above. The cut is likely to fuel growth for the real estate and auto sectors.

All that is great. But what does this mean for your pocket? Well, simply put, it

means reduced EMI burden on your outstanding loan. When the repo rate is

reduced, it translates into lower cost of funds for the bank, which in turn reduces

the rate at which they lend to the end customer, You.

Assuming the entire benefit of the rate cut is passed on to the customer, a person

who has taken a home loan of 50 lakhs for a period of 20 years, would end up

paying Rs. 1644 per month less in EMIs. A quick look at the EMI calculator on

Rupeeower shows that over the period of the loan, the saving translates into a

substantial amount of about 40 lakhs (not considering the compounding effect of

the savings).

Most people do not do much about this reduction in EMI. The additional Rs.1644

every month, typically gets spent on other household expenses. A smart person

will use this money to pay out the loan faster. The additional savings can be used

to lower the tenure of the loan such that the EMI remains the same as you were

paying before the rate cut, but the loan can now be paid off in lesser time.

Continuing with the above example, if you continue to pay the ‘pre-rate cut’ EMI,

you can pay off the loan in just 18 years!

Did you know that on a 50 lakh loan over 20 years, the interest component itself

is 65.8 lakhs!! The RBI has brought festive cheer by reducing the rate beyond

expectations. Be Smart, use the opportunity to become debt free, faster!

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