EXPLAINED! What does RBI announcement mean for home loans, business loans, fixed deposits

RBI Announcement: The Reserve Bank of India (RBI) announcement today had various relief measures both for the banks and for the business community. However, if we go by the tax and investment experts' views, it may bring some relief to borrowers too - home loans, car loans, bike loans and business loans. They are of the opinion that by cutting the Reverse Repo Rate (RRR) the Central Bank has provided additional money into the hands of banks. Since, Central Bank has cut interest it is paying to the commercial banks, they will have to use other options to generate money. In that case they may think of relaxing interest rates on their business and retail loans. However, they might not increase the bank fixed deposit interest rates  immediately.

Speaking on how RBI announcement will impact loans and fixed deposits, Pankaj Mathpal, Founder & CEO at Optima Money Managers said, "After 0.25 per cent interest rate cut by the RBI on its borrowings from the commercial banks, banks will find out other options to generate money and loans can now become an aggressive money generation tool for them. However, in this lockdown, chances are slim for loan borrowers to benefit, but business loans are definitely going to peak. Banks may offer business loans at lower interest rates to generate more business. Once the lockdown is removed, banks may offer home loans and other retail loans at lower interest rates as they need to increase their business, which they have lost in the last one month due to the Coronavirus lockdown."

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Kartik Jhaveri, Director — Wealth Management at Transcend Consultants said, "When banks will go aggressive in their loan business, they will certainly try to lure loan borrowers by reducing loan interest rates. Since, business loans are going to hit a high, we can witness some interest rate reduction. However, when it comes to retail loans like home loans, car loans, bike loans and other loans, banks may decide to offer such retail loans at lower interest rates once the lockdown is lifted." 

However, Jhaveri said that there is no dearth of liquidity at banks and hence there might not be any interest rate increase in bank FD, but there might not be any fixed deposit interest rate band coming as banks can't afford to lose money currently. Why? Because once the lockdown is lifted, there can be huge redemptions in mutual funds and hence banks won't reduce fixed deposit interest rates in near future.