Interest Rate Cut Will Have A Two-Fold Impact On Common Man
DSIJ Intelligence / 20 Apr 2012
The lower interest rate will definitely be a positive for those customers who are planning to take a loan or have existing loans (floating rate). At this point, individuals should negotiate hard with the bankers to get the loans at the best (lowest) rates. In case of those who have already taken loans and are paying EMIs, relief will be imminent.
| Loan Amount | Rate Of Interest (%) | Tenure (Yrs) | Existing EMI (Rs) | Revised Rate (%) | Revised EMI (Rs) | Approximate Saving Monthly (Rs) |
|---|---|---|---|---|---|---|
| 20,00,000 | 11 | 10 | 27,550 | 10.75 | 27,267 | 283 |
For example, if an individual has taken a loan of Rs 20 lakhs at 11 per cent rate of interest for a tenure of 10 years, he would be paying an approximate EMI of Rs 27,550 and hence if the bank reduces its interest rate by 25 basis points to 10.75 per cent, his approximate revised EMI would be Rs 27,267, resulting in a monthly savings of Rs 283. However, one should note that the actual scenario may be different as it depends on individual to individual and from bank to bank. Also, consumers usually accept a longer tenure for increased interest rates to avoid higher EMI outgo.
On the other hand, risk-averse investors who usually have more exposure to assets class like fixed deposits may now get a lower return. The banks are also planning to reduce the rate by 25 to 50 basis points on the deposits. This will be effective very soon and hence investors holding cash or who wish to invest in fixed deposits must rush to the banks immediately as the same might be available at lower interest rates.
When we look at the impact of the rate cut from a bank’s point of view, it is obviously positive. The demand for credit growth could pick up as the corporate sector and consumers may take loans available at a slightly cheaper rate. The credit growth decelerated from 22.1 per cent at the beginning of 2011-12 to 15.4 per cent in February 2012. However, it picked up again in March 2012 to 16.8 per cent. For FY13 the RBI has projected credit growth to be around 17 per cent. We might also see improvement in the banks’ net interest margin (NIM) in the June quarter of 2012. Further, there could be some easing on the NPA pressure which the banks are currently facing as corporate and retail customers might again try to repay the dues in a timely manner.
But has the rate cut really benefitted the common man is the moot question. No doubt it will be advantageous to all those who want to obtain loans. But the lowering of the deposit rate will actually result into negative returns in the hands of the individuals. Meanwhile, the consumer price index (CPI) for inflation in March has come in at 9.47 per cent and it is further believed that inflationary pressure will persist in the economy. With the one year fixed deposit rate, which is currently at around 9.25 per cent, probably coming down to below 9 per cent or at 9 per cent, this would result into a negative cash flow for the common man (as inflation is at 9.47 and fixed deposits rate would be around 9 per cent, resulting into negative 0.47 per cent). For the betterment of our economy and for the common man, we hope that things work as per the RBI’s projections and that inflation continues to moderate going ahead and growth picks up slowly and steadily.
If you want to stay updated with the share market news today, keep a close watch on the indian stock market today with real time movements like sensex today live and overall stock market today trends. Investors tracking ipo allotment status, ipo news today, or the latest ipo india can also follow daily updates along with bse share price live data. Whether you are learning how to invest in stock market in india, preparing for a market crash today, or searching for the best stocks to buy in india, insights on top gainers today india, top losers today india, trending stocks india and long term stocks india help in making informed investment decisions.