Know the impact on loans and deposits!

As widely expected, the reserve bench Friday kept key rates unchanged in its first bi-weekly monetary policy meeting this fiscal year. While the RBI’s decision may appeal to borrowers, as they are currently paying the lowest interest rates in more than two decades, investors and depositors have reason to be cautious.

The six-member RBI rate-setting group maintained the status quo on pension rate and repo rate at 4% and 3.35%, respectively. More than 22 months have passed since the last change in the repo rate when it was reduced to 4% on May 22, 2020, the lowest rate since April 2001.

Here’s what’s likely to happen to FD rates and what depositors should do. Plus, we also tell you what borrowers should also expect.

Short-term deposit rates may rise first

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Whenever the interest rate cycle turns around from the bottom, it is usually short and medium-term interest rates that are likely to rise first. As for long-term interest rates, it will take a little longer for these rates to rise significantly.

Locking in longer-term deposits at a lower rate

If you are thinking of buying an FD now or looking to renew your existing FD, it will be better to opt for a shorter term FD, say a year or less, so that your deposit is not locked in at a rate lower for a long time. Whenever the short and medium term rates increase, you can start increasing the duration of the FDs accordingly.

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Impact on borrowers

With RBI maintaining the status quo, banks are unlikely to raise interest rates on loans in the immediate future. However, the low interest rate regime may not last long. Here’s a look at how existing borrowers and those looking to take out a new loan (whether it’s a home loan, car loanor Personal loan) can take advantage of RBI’s break.

Home loan borrowers

With the repo rate at the lowest level seen in the past two decades, the continuation of the low interest rate regime bodes well for borrowers.

With no increase in the repo rate, a new borrower who plans to take out a home loan in the near future can still get loans at the low prevailing rates for a while.

Existing Borrowers Need to Consider and Act: No change in the repo rate means existing home loan borrowers will continue to pay their EMIs at the same interest rate.

Car loans

The maximum duration of a car loan varies between 5 and 7 years. Depending on whether you are considering taking out a new loan or are an existing borrower, you can use this break in the repo rate to your advantage.

Most auto loans are still financed on a fixed interest rate basis, meaning whatever interest rate you get at the time you get the loan will remain fixed for the duration of the loan. Hence, when one takes the loan becomes critical.

Personal loan

New borrowers should use an extra window: Also in the case of personal loans, banks are unlikely to raise rates any time soon. So if you’re considering taking out a personal loan, be sure to keep your credit score with you so you can verify the best rate based on your credit score. The higher your credit score, the better your chances of getting a loan and that too at a good interest rate.