Home Events Activities
6 - MIN READ

Governor Shaktikanta Das Announced 4% Drop In The Substitution Rate From The Current 4.4% To Boost The Economy

This was the lowest repo – or main interest rate that RBI has provided commercial banks with short-term funds

https://www.thestatesman.com/business/loans-rbi-cuts-repo-rate-25-basis-points-policy-stance-neutral-1502730586.html

The press conference highlights the following: The Monetary Policy Committee ( MPC) on Friday shrank the repo rate from 4.4 to 4% by another 40 basis points following a three-day off-cycle meeting. RBI Governor Shaktikanta Governor Shaktikanti Das of The Reserve Bank of India ( RBI), in a press conference, confirmed that the joint decision was taken to resuscitate the development of the pandemic and mitigate it. Around the same period, the reverse registry limit was lowered to 3.35%.

Image source:

In the meantime, Das said that GDP growth would continue on negative ground and in the second half, some will recover. There must be requirements for the phased reactivation, in the 2nd half of 2020–2021, for parallel political , monetary and administrative steps.

The freeze on term loans eligible for usage prior to May 31 of the measures introduced was expanded to August 2020 by another three months.

In two months, Das spoke about his third press conference since India locked down to keep the Covid-19 distribution. He was briefed on a series of five press conferences on the 20 lakh crore economic package for India to mitigate the impact of the pandemic of Coronave virus, days after Union finance minister Nirmala Sitharaman.

In fact, by another three months until August 31, the Central Bank expanded the moratorium duration on mortgage and credit card loans. In March RBI issued an EMI moratorium for three months from 1 March and 31 May to assist lenders in grappling with the coronavirus-connected funding shortfall.

Here is the meaning of these important announcements everyone should be accustomed to:

Avoid the moratorium on EMI:

Image source:

In reality, the continuation of the moratorium would benefit those who are confronted with a brief financial crunch. Yet, since it is accessible, you shouldn’t take it. Select only if it is required and during this time the interest rate is paid on the outstanding loan.

“It is worth to re-emphasise this extension of loan EMIs doesn’t mean a waiver on repayments as interest will continue to get accrued on the principal outstanding. Simply put, you’ll be well-advised to take the moratorium option only if you’re finding it extremely difficult to repay your loans during these six months,” says Adhil Shetty, CEO, BankBazaar.

Any credit card payment moratorium dues is prohibited:

Image source:

It would not be a good choice to vote for moratoriums on credit card payments. It would be a safer option than to take a hold on the emergency savings or even a personal loan since credit card interest rates sometimes hit 30%-40%.

Project your refunds to choose the moratorium on the EMI:

Image source:

In reality, expanding the moratorium would help anyone confronted with a short-term financial crisis. However, all assessments must be made in advance and a scheme must be formed to reimburse, in particular the accrued interest during the moratorium. Make sure that you repay it soon after the moratorium expires, otherwise your loan will be increased and interest will increase. “Opting for the moratorium could extend your loan tenure by tens of EMIs, considerably adding to your loan burden, especially if you’ve just started repaying your loan. The point being, calculate the accumulated interest before you take the moratorium, and see whether you can pay it back, in addition to your EMIs, quickly,” says Shetty.

Repo cost lowers the lenders’ effect:

Image source:

The rate cut is good news for home loans , car loans and other borrowers that will quickly see an easing of their EMI burden. Please notice that the rate reduction for lenders who have linked their loan to the repo rate would be transferred quicker to EMIs. You may need to wait longer if your loan is still connected with the MCLR.

MCLR is an internal measure, and the repo rate does not decide the credit rates strictly. There are also other streams of funds, and therefore, the reduction in the mortgage level will several times not result in a decline in the end customers’ lending rate (similarly).

“On the other hand, RLLR is an external benchmark which is more transparent. The borrower does not depend upon the bank to decide the lending rate, it automatically gets adjusted with repo rate. As we know, the repo rate has been cut once again today. Looking at the economic downturn, it is expected to be cut further. Since the transmission happens quickly in case of repo linked lending rate, it will be directly beneficial for the borrowers.”

Price reduction of depositors effect:

Depositors hold their funds in bank accounts and fixed deposits face tough times when interest levels start to decline. Deposits at State Bank of India for one to three years have already reached 5.5%. There can be a further decrease. If you’re a conservative investor, the FDs will be monitored to boost their performance, and other healthier investing choices can be considered as well. In the near term (1-2 years) your needed money should be parked in FDs, and the money you don’t need should be put in a mixture of higher-return investments, including VPF, PPF, Sukanya Samriddhi or 7.75 percent bond from the GOI. The pensioner can opt for Senior Citizens Savings Scheme. Many corporate fds and small bank fds also offer you more than 8%. You should pick them according to the tolerance for danger and return needs. Go for AAA ratings service FDs.

This was the lowest repo – or main interest rate that RBI has provided commercial banks with short-term funds – reported as early as 2000. The reduction in the main interest rate would allow banks to will their borrowers’ EMI burdens. The RBI governor has also expanded the credit moratorium for another three months to August, which enables banks to delay EMI payments from their customers.