Home loan borrowes should continue with floating interest rate loans
The Reserve Bank of India unanimously decided to continue with a rate hike pause on Thursday. This is the third time the RBI MPC has decided to press the pause button on the repo rate hikes.
The repo rate stands at 6.5 per cent. Since 2022, the repo rate has been hiked by 250 basis points. The RBI had kept the rates unchanged in April and June meetings too.
Lock in your desired FDs
The average interest rates on outstanding rupee deposits with banks has been rising month on month for 15 straight months now. This is visible in bank FD rates that are constantly nudging up past brief periods of pauses. For consumers, this is a good time to lock into the best available rates. They can reinvest their deposits for higher rates which are typically available in the 1-3 year space.
For home loan borrowers, fixed-rate loans may be available in the market at some discount compared to floating-rate loans. However, since rate cuts are expected in the foreseeable future, it is better to continue with floating interest rate loans for now.”
“A steady repo rate implies stability in the interest rates offered by banks. Home buyers who have taken loans or are planning to take loans for purchasing property can benefit from the unchanged repo rate as it may lead to consistent or slightly lower borrowing costs,” said Adhil Shetty, CEO of Bankbazaar.
Despite the repo rate shooting from 4.00 to 6.50, interest rates on new floating home loans have stabilized and fallen. BankBazaar looked at five large lenders who were lending between 6.50 to 6.70 per cent in March 2022. Three of them peaked at 9.00 or higher in April 2023. In August 2023, four are now lending between 8.40 and 8.60.
Data sourced from Bankbazaar is from first Friday of previous months and subject to revision. Lowest HL rates; FD rates show highest rates for tenors ranging from <1 years to 3 years. Rates as advertised by lender’s websites. HDFC rates: NBFC for home loan up to July 2023. FD rates for small deposits for depositors under 60.
“Eligible borrowers paying above the market rate can consider a loan refinance or balance transfer to ensure savings through these inflationary times.,” said Shetty.
Borrowers also need to apply a cautious approach, prepay their high interest debts, borrow responsibly and pay their bills on time to incur any additional cost to their existing financial liabilities.
Mutual funds:
Investment in mutual funds is a long-term strategy, repo rate may or may not impact much for investors looking at 5, 10 or longer investment horizons to let their funds grow.
“You can opt for the funds that have generated consistent and higher returns in the past and begin your mutual fund investment journey after evaluating your risk appetite and financial goals,” said Shetty.
What about markets?
Indian equity markets have seen a tremendous momentum in the last couple of months. The repo rate decision is likely to maintain this positivity among investors.
Add duration to your portfolio
” Next few months would be a good opportunity to add duration to the portfolio with a 12 month investment horizon. It would be difficult for risky assets to perform in face of the headwinds caused by tight monetary and financial conditions,” said Sandeep Bagla, CEO , Trust Mutual Fund.
“With RBI placed comfortable with CPI level of 5.5 and GDP at 6.6, it augurs will for the market and in short term. The short-term dip in the market, if any, may be seen as an opportunity to buy stocks. In all probability, we might see a rate cut of 25 bases next to the next policy meet. With easy liquidity and stable rate with downward bias going forward, investors can retain their positions or portfolio for now,” said Milan Sharma, Founder and MD, 35North Ventures, SEBI Accredited VC Firm in India.