The RBI today cut the repo rate by 25 basis points, with it the new key rates stand at 6.0%. The decrease in repo rate is justified given the low economic growth as well as inflation rate which has remained well under check.
Impact on depositors
And after the cut, depositors are likely to be less impacted as there is already a lag in deposits growth in contrast to credit growth. The depositors who have already booked in their deposits at higher rate will continue to fetch higher rate of return till its maturity.
Also, going ahead banks may look to cut down on the interest rates on deposits but not in the same proportion as the repo rate cut.
SBI also has pegged linking its savings deposits accounts with deposits of more than Rs. 1 lakh to repo rate beginning May 1, 2019.
It is worth mentioning that RBI in its MPC meet today also deferred its earlier decision to peg loan rates to external benchmark such as repo rate as against current MCLR rate for better transmission of policy rates.
Impact on borrowers
The borrowers may have the view that RBI's rate cut will mean reduction in EMIs for them, but the move is likely to take some time as the earlier decision to enable better policy transmission has also been deferred by the apex bank.
Also, another important pointer here is that most retail loans as of now are pegged to MCLR rates and as the cost of funds for banks also includes deposit rates and these rates do not come down in proportion to repo rate, MCLR rates and hence the lending rates will be reduced only marginally.
Further, a reduction in EMI for borrowers is effected only with the next reset date as in the case of a home loan even if the bank reduces the marginal cost of funds based lending rate.