RBI monetary policy: Why your home loan EMI won't go down even if rates are cut tomorrow

While it's highly unlikely that RBI would cut rates in the upcoming monetary policy review tomorrow amidst concerns of rising inflation. However, various economists, industry bodies and the government are looking for a rate cut to revive the sagging growth in the economy. In the first quarter, growth in the economy fell to 5.7%. Many are of the view that there is room for a rate cut. In its last monetary policy review, RBI had cut repo rate by 0.25 per cent to 6 per cent, citing low inflation. So if the RBI concedes to the demands of the industry and government and brings interest rates down, will your home loan EMI fall?

Before you rejoice, we tell you that why you may not see its impact on your EMI.

Firstly, if you have availed a loan after April1, 2016 it is most likely linked to Marginal Cost of Funds-based Lending Rate (MCLR) a benchmark lending rate system applicable to borrowers. However, the latter comes with reset period of different maturities like 6 months or 12 months. In case of a rate cut, you have to wait until the next reset date to avail the benefit. For instance, in a 12-month reset period home loan, if one takes a home loan in August 2017 and the RBI cuts repo rate tomorrow, your bank would bring MCLR down in the same month, but as a borrower you will see it effect only next August.  

If you agreed for 6-month reset period on your home loan in the home loan agreement, you will see the impact only in January next year. So, in a way there is a waiting period in the offing for you even if RBI cuts rate tomorrow.

The shorter the reset period, the more frequently your loan rate will change. However, if you want to avail the benefit of a rate cut, a change in the reset period is possible upon payment of a service charge. But you must check if this option is allowed by your bank. So if you agreed on six-month MCLR, you can change the MCLR to 12 months, or vice versa, in the middle of the tenure.

Secondly, if your loan is linked to base rate - another benchmark for lending rates, for borrowers who availed loans before April 2016, it is highly unlikely that the bank would transfer the rate cut to you. This is because banks have already doled out the cut in base rates as a part of their festive offers and unlikely to do soon. A number of prominent public sector banks like Oriental Bank of Commerce (OBC), State Bank of India (SBI), Punjab National Bank (PNB) have reduced their base rates recently.

While SBI has cut its base rate by 5 basis points to 8.95 per cent from 9 per cent with effect from October 1, Bank of Baroda reduced its base rate to 9.15 per cent from 9.50 per cent. Andhra Bank too lowered its base rate to 9.55% from 9.70%