What is the Impact of RBI Rate Cut on EMI of Loan ? – Recently Reserve Bank of India (RBI) has hiked the Repo and reverse repo rate for financial year 2016-17. The Rate cut on Repo i.e. the rate at which bank borrows money from central bank have been reduced by 50 basis points or 0.50% to 6.50% where as reverse repo kept at 6%.
What would be the benefit for customer of bank if RBI reduce the interest rate ? This is very common question asked by many viewers. Many of them asked that their EMI didn’t come down even after hike in repo or reverse repo.
RBI’s rate cuts does not necessarily mean that the borrowers benefit immediately. Unless the bank where customer hold the account doesn’t reduce its Base Lending rate or MCLR. The interest rate on loan get reduced only once the base rate of the bank falls. The EMI is directly linked with the Interest rate.
There are many cases where the EMI of the loan account doesn’t reduce even after reducing the lending rate of the commercial bank. Banks at their discretion reduce the [highlight]loan[/highlight] tenure in lieu of installment. That means your monthly EMI installment amount remains the same. The rate cut will make a substantial difference if the remaining loan term/tenure is very long.
This is to remember that the rate cuts will not have any impact on Fixed rate [highlight]home loans [/highlight]or Fixed rate consumer loans. The rate of interest is fixed with respect to fixed loans.