No change in your EMI

Last Updated: Tue, Jun 18, 2013 05:15 hrs

The Reserve Bank of India (RBI) has signalled there would be no further interest rate cuts. Hence, your monthly instalment is not getting any lower, for now at least. After three successive rate cuts, the RBI has now taken a defensive stance, citing rising inflationary pressures on the economy and warning the weakness in the rupee and rising prices of diesel are worrying signs.

The central bank kept the repo rate, the rate at which it lends to commercial banks, unchanged at 7.25 per cent; and the cash reserve ratio, the proportion of deposits banks must keep with the RBI as cash, was also left unchanged at four per cent. Says Sumeet Vaid, founder and chief executive of Ffreedom Financial Planners: "I am not surprised at the rate cuts not happening and for the next few months. But the longer-term trend in rates still looks down."

For existing floating rate home loan borrowers, there will be no reduction in home loan monthly instalment. Banks usually reduce your outstanding loan tenure to factor in the fall in home loans. With inflation still ruling high, especially consumer price inflation, the RBI might prefer status quo for some time. Hence, new borrowers in search of a house should take advantage of the lower rates as this might just be the base for the next few months.

Car loans and personal loans are also expected to hold steady for now. If you opt for a car loan now, you might secure a better monsoon discount, which could be used to reduce equated monthly instalments (EMIs). Interest rates on personal loans are still ruling at 16-22 per cent.

For bank depositors, the stall in the rate-cut cycle has been a blessing. Fixed deposit investors could still get decent rates for bank deposits if they lock in for three to six months. Income fund investors can now focus on short- and medium-term bond funds, as they five better yields. As short-term bond funds invest in shorter-maturity fixed income paper, the impact on these funds would be minimal. Says Vaid: "Short- and medium-term bond funds are still preferred funds, though investors should stay invested in those for at least the medium term."

Longer-term bond fund investors, however, might not see an increase in net asset value gains as long-term interest rates have held steady. In fact, the 10-year G-sec yield has risen slightly to 7.33 per cent, which might put pressure on bond prices and net asset values of long-term bond funds. But, on the whole, bond funds are not likely to lose much in the short term. Says Karthik Jhaveri, director, Transcend Consulting (India), "Bond funds should be stable in the short term as rates have been left unchanged."

Direct investors could focus on buying high-yield bonds directly from the market and hold these till maturity. The yields are expected to improve.

With the RBI raising warning signs on inflation, investors might see lower real returns if inflation rises, while those embarking on building their wealth may not have enough savings. Says Jhaveri: "Saving potential reduces for investors who don't have the investing capital". Statistics show inflation is trending lower. However, investors should not take this for granted and continue to look for higher yields.

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