{"id":6555,"date":"2015-09-30T01:41:30","date_gmt":"2015-09-29T20:11:30","guid":{"rendered":"http:\/\/www.apnaplan.com\/?p=6555"},"modified":"2019-04-04T14:53:05","modified_gmt":"2019-04-04T09:23:05","slug":"rbi-rate-cut-impact","status":"publish","type":"post","link":"https:\/\/www.apnaplan.com\/rbi-rate-cut-impact\/","title":{"rendered":"Impact of RBI Rate Cut on Your Investments and Loans"},"content":{"rendered":"
RBI (Reserve bank of India) has cut the Repo Rates by 0.25% (25 basis points) from 6.25% to 6.00%<\/strong> in its latest monetary policy presented on April 4, 2019.<\/p>\n In case you were wondering what Repo rate means, Repo rate is the rate at which the RBI\u00a0lends money to banks.<\/strong>\u00a0So if Repo rate comes down so does the overall interest rates.<\/em><\/p>\n Also Read:<\/strong>\u00a0Historical Repo Rates in India<\/a><\/p>\n<\/blockquote>\n As this happened all the newspaper and social media was all gung-ho that EMIs would come down. But its not that simple. We tell you the details below.<\/p>\n There was too much pressure from government, industry and investors on RBI governor to cut rates. But the question is who benefits the most from these cuts?\u00a0The answer is Banks and Lending Institutions.<\/strong> And here is an example to prove the point.<\/p>\n Take SBI, the biggest bank has cut its base rate (the lowest rate at which the bank can lend) just by 0.3% in 2015. It was 10% at the start of 2015 and they cut 0.15% on April 7 and additional 0.15% on June 2.<\/p>\n As for the interest rates on Fixed Deposits are concerned there has been a significant cut. SBI used to offer 8.5% for 3 to 5\u00a0Year fixed deposit at the start of 2015. As of today, this rate has come down to 7.25% for\u00a0the same tenure of FD. A cut of 1.25% from beginning of 2015.<\/p>\n To summarize in last 9 months,\u00a0RBI has cut repo rate by 0.75% while SBI has cut its base lending rate by 0.3% and deposit rate by 1.25%.\u00a0The story is similar across banks.<\/strong><\/p>\n<\/blockquote>\n This in turn has increased the spread between the deposit and the lending rates. The more the spread is the more money banks make.<\/strong> The problem is all banks operate almost like cartel and do not pass on rate cuts to borrowers.<\/p>\n Also Read:\u00a0<\/strong>22 Hidden Charges in Saving Bank Account<\/a><\/p>\n<\/blockquote>\n This problem has been stated by RBI too when it says – Median base lending rates of banks have fallen by only about 30 basis points, despite extremely easy liquidity conditions.<\/p>\n I think RBI has done its part and now it\u2019s time government and industry put pressure on banks to pass on the interest rate cuts in right spirit to their borrowers.<\/strong> Until this happens the benefit of lower interest rate would not be passed on to business and to the economy.<\/p>\n Rate cut is especially bad for investors who invest in fixed income products like fixed deposits<\/strong>, recurring deposit, etc. Unfortunately this impacts senior citizens who mainly depend on interest income for regular income. As can be seen from SBI, banks act evil by cutting deposit rates very aggressively.<\/strong><\/p>\n Also Read:<\/strong> Highest Recurring Deposit Interest across 44 banks<\/a><\/p>\n<\/blockquote>\n Also with pressure from banks, government is planning to cut interest rates on Small Saving Schemes<\/a> like PPF, Senior Citizen Schemes, Post Office Deposits, Sukanya Samriddhi Accounts midyear. Ideally the interest rates on small saving schemes are reset only at the start of financial year<\/a>.<\/p>\n We discuss how rate cuts by RBI impacts your investments and what should you do about it.<\/p>\n This is most popular saving\/investment in India. As you can see above\u00a0Rate cut is always bad for FD investors\u00a0as the interest offered by banks would go down significantly and hence your returns<\/strong>.<\/p>\n What you can do?<\/strong><\/span><\/p>\n Here are the things you can do to lock higher interest rates:<\/p>\n The interest rates on Small Saving Schemes like PPF, Senior Citizen Schemes, Post Office Deposits, Sukanya Samriddhi Accounts are revised at the start of every financial year and is linked to yields on Government Bonds. But under pressure from banks Government is looking to revise it midyear. So investors in these schemes would get lower interest rates.<\/strong><\/p>\n Also Read:<\/strong>\u00a0All about PPF,<\/a>\u00a0Senior Citizen Saving Scheme<\/a>\u00a0&\u00a0Sukanya Samriddhi Account<\/a><\/p>\n<\/blockquote>\n A decrease in interest rate increases the price of bond,\u00a0which gives capital gains to investors.<\/strong> So in case you feel that the interest rate is going to go down further, it might be good idea to invest in bonds\/NCDs.<\/p>\n NTPC had issued its tax free bonds<\/a> a few days ago, which was over-subscribed on the first day itself. PFC too is offering its tax free bonds from October 5 with similar interest rates. \u00a0There are other companies in queue with their tax free bonds. If you wanted to subscribe to these bonds go ahead and invest in PFC tax free bonds<\/a><\/strong>. The next series of bonds from other companies would have even lower interest rates. As stated above lowering of interest rates would give capital appreciation.<\/p>\n Interest rate change impacts longer term debt funds more than its short term debt counterparts. So again\u00a0if you feel that interest rates are going down invest in long term gilt\/debt funds.<\/strong>\u00a0You can reap good capital gains when the next few cuts happen.<\/p>\n\n
Who Benefits from Rate Cuts?<\/h2>\n
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Who loses from Interest Rate Cuts?<\/h2>\n
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Impact on Investments:<\/h2>\n
Fixed Deposits (FD):<\/h2>\n
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Small Saving Schemes:<\/h2>\n
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Bonds\/NCDs:<\/h2>\n
Tax Free Bonds:<\/h2>\n
Debt Mutual Fund:<\/h2>\n
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