Thursday Trivia – Impact of base rate reduction

Thursday Trivia – Financial decisions when starting a family
April 1, 2015
Thursday Trivia – Why and how to create an emergency fund
June 11, 2015

Thursday Trivia – Impact of base rate reduction

Greetings to you from Circle Wealth Advisors…

Last couple of days has been eventful in terms of banks and RBI deciding on interest rates. RBI announced its monetary policy and kept all the interest rates unchanged. But strong statements given by RBI governor led major banks to decrease the interest rates they are charging to their customers. Let’s understand what these changes are and how does it impact us

SBI, HDFC bank, ICICI bank and Axis bank have announced reduction in base rates. In case of first three banks the base rate is reduced by 15 basis points bringing it down to 9.85%. While in case of Axis bank the base rate has been reduced to 9.95 down by 20 basis points

Understanding Base rate

It is the minimum rate of interest that a bank is allowed to charge from its customers. Unless mandated by the government, RBI rule stipulates that no bank can offer loans at a rate lower than base rate to any of its customers.

What’s the impact?

On Individuals – Decrease in bank rates means decrease in EMI, that retail customers like us are paying. Hence it will help in bringing down interest outflows and increase savings.

On banks – This will lead to pressure on margins as this will result in fall of interest income for them.

 Our take

In a sense its good news, as it helps in increase of saving. But as you would note that the reduction is not much, current home loan rates are at around 10.15%, with reduction of base rate, the new rate applicable will be 10%. As a result of this reduction one would save less than Rs 500 a month. (20 year loan for Rs 50 Lakhs). For someone under a debt of Rs 50 lakhs, saving of Rs 500 a month will sound negligible. The only thing positive is that, seemingly things have started moving in favorable directions and in future more rate cuts might result in more savings.

Happy Investing!!! 


Leave a Reply

Your email address will not be published. Required fields are marked *