RBI rate cut effects – FAQ’s

Transcript of Kartik Jhaveri’s Money Manager show on CNBC Bajar, dated 20-01-2015.

1)          What is RBI rate cut and RBI reverse rate cut?

1. There is no RBI rate cut and reverse rate cut. They have a repo rate and reverse repo rate.
2. Repo rate is one where Central Bank (i.e. RBI) lends money to the commercial banks in India.
3. Reverse repo rate is where RBI borrows money from commercial banks.

2)          How much rate cut do affect an individual investors?

1. The rate cut affects an individual investor positively & negatively.
2. Assets such as stocks, tax free bonds, bond funds etc. reacts positively to such a change and hence the investor has the option to invest in them.
3. Fixed deposits yield lesser hence investor does not like them but it is good for country and economy.

3)          When RBI cuts its rates, is it compulsory for Banks to cut the rates? And if yes then by what time should they cut the rates?

1. After the RBI repo rate cut, it is not compulsory for the commercial banks to reduce the rates.
2. It depends totally on the commercial banks to cut the rates or not.
3. When a commercial bank thinks of cutting the rate they need to first do an Alco meet i.e. Asset-liabilities committee meeting in order to arrive at a decision and then only their rates get reduced.
4. It is natural to expect but bank can decide its PLR (prime lending rate).

4)          Now the question is how is it affecting to home loans?

1. When commercial banks receive money from central bank at a lower rate they normally do change their rates also.
2. This change is positive from consumer perspective as they will have to pay less interest rate on home loans as EMI.
3. Lower interest rates means cheaper finance, higher eligibility, and best of all, lower EMIs for new borrowers.

5)          If we get new home loans on lesser rates then will it be injustice for those who have already taken loans, or there is something for them also?

1. When the base rate goes down, existing borrowers automatically step down to a better rate (in case of floating loan rates)
2. New borrowers get the prevailing new lower rates

6)          What has changed for existing borrowers in base rate regime?

1. Earlier new borrowers celebrated discounted interest rates, existing borrowers ended up paying high interest rates. During this time when the PLR (Prime Lending Rate) was going upward increasing the interest rate for existing borrowers resulting in a higher cost of finance, the new borrowers were offered cheaper rates of interest.
2. Lenders offered a higher margin to the new borrowers and managed to keep their new loan rate the same. There were instances of old borrowers having their interest rates as high as 13%, while new borrowers were offered rates as low as 9%. What a pity for existing borrowers!
3. It is a level playing field now.

7)          Is rate cut doing affect in FD & RD, what are the key things to keep in mind for investors?

1. With the repo rate coming down by 25 bases, the FD rates will also come down immediately.
2. This is because the commercial banks will have to reduce their lending rates and hence cannot provide a higher FD rate.
3. Hence if the consumer wants to invest for 3 -5 years with a return of 7-8% after tax then they can invest before the commercial banks reduce their FD rates.

8)          How does rate cut do effect on Bond market and bond funds?

1. You can ride the low interest rate cycle by opting for long duration funds – mutual fund schemes that invest in long term bonds issued by government and corporate entities.
2. When interest rates fall, the prices of the bonds go up and long term bonds are more sensitive to interest rate changes.
3. Long term bonds may offer high capital appreciation as compared to a short term bond

9)          Is it advantageous to invest in fixed maturity plans?

1. If you do not want to take risk and volatile returns and not have a problem of liquidity then you can invest in FMP at the current rates.

10)       Is it beneficial to invest in tax free bonds?

1. When interest rates fall, the prices of the bonds go up and long term bonds are more sensitive to interest rate changes.
2. These bonds can see further price appreciation if interest rates fall further, may offer high capital appreciation as compared to a short term bond
3. Also investors will have appropriate tax treatment on capital gains.