RBI Rate Cut Impact: Rush for Fixed Deposit and wait for your Loan

Reserve Bank of India (RBI) in its monetary policy presented on January 29, 2013 cut repo rate and cash reserve ratio by 25 basis points each.

Repo rate, the rate at which banks borrow from the central bank, has been slashed to 7.75%; and the cash reserve ratio, the portion of bank deposits the banks keep with RBI, has been reduced to 4%. This would effectively translate into lowering of fixed and recurring deposit rates and also lowering of loan interest rates. So it’s good news for borrowers but not good for fixed deposit investors.

After the RBI policy announcement, IDBI bank was the first to announce 0.25% cut in deposit and loan interest rates. The cut would be effective from February 1, 2013. Most of banks are expected to follow suit.

FD Investors – What should you do?

In case you are fixed deposit investor, it makes sense to lock your investment in long term fixed deposits as interest rates are expected to come down by next week. Click here to check the 50 Best Bank Fixed Deposit Schemes.

Click here for Best Long Term Bank Fixed Deposit Rates

In case you don’t have the bulk amount but still want to lock your future investment at higher interest rate – recurring deposit with banks is a great idea. You can read the details of recurring deposit here.

In case you wanted to invest in tax free bonds, IRFC has extended its last day for subscription to February 8, 2013. With rate cuts these bonds have become slightly better investment.

Loan Seekers – your next steps?

If you were looking for new home or auto loan this interest rate cut would mean a lower EMI and higher eligibility of loan. So this is good news for you. I think in next one week most of banks would cut loan rates and that would be good time for you to start your paper work. In the meantime you can start enquiring about the loan.

In case you have an existing loan, the lender may or may not pass on the benefit of rate cut. In case it does it would surely reduce your EMI. Below is the table showing the benefit in term of reduction in EMI by 0.25% cut in Home loan interest rate.

In case it does not you would like to shift your loan. Click here to know how much you can gain by shifting to lower interest rates loans.

More Rate cuts in March?

There is speculation that there RBI might further cut 0.25% rates in its March 2013 policy review. This might happen if the inflation number goes down or the growth suffers or there is political pressure. If you are expecting further rate cuts it makes all the more sense to rush your fixed deposit investments when the interest rates are higher and wait in case you are looking for loans.