How The RBI Repo Rate Affects Fixed Deposit Interest Rates

The latest piece of news making the rounds in the finance world is that the RBI has changed the money policy in the third quarter of the financial year 2013-2014. The Repo rate (short term lending rate) has been increased from 7.5% to 8%. Most business lenders cannot approve of this hike as select loans will in turn see a hike in their interest rates. Let’s try to understand these dynamics in detail.

Repo rate: Meaning

This is the rate at which the Reserve Bank of India (RBI) lends money to commercial banks in case of any shortfall of funds. A higher repo rate means that nationalized and private sector banks will be less keen to take any money from the RBI. Thus, it limits the availability of funds for the common man. How easily can you get a loan in today’s market? The repo rate will affect the interest rates and the simplicity of the process as well. The impact may not be direct for most readers who argue that there are several other factors in the mix. However, it won’t be a factor without any influence either.

Repo rate hike: Consequences

Obviously, this hike will increase the home loan rates and EMIs over a period of time. It may not affect all types of loans, but home loans will definitely get affected. This is a long term consideration for most banks though, as no bank has increased their lending rate as of now. In fact, investors can even anticipate lower fixed deposit interest rates . The rates, as banks apply it, is a function of demand and supply. This hike in the short term lending rate will deter several business owners, investors and all retail borrowers from borrowing money from a bank. Banks, in turn, won’t be in a position to pay off people who have invested in fixed deposits. Thus, the interest rates on term deposits should fall down.

How to use it to your advantage?

If you are planning to borrow in this economy, it can be a bit hazardous right now. The rate hike will affect all existing and new customers. But, in these uncertain times, fixed deposits are at its highest in terms of rates. The looming threat of elections and potential fall in FD rates can continue till banks have to step out of the current status-quo strategy and make decisions. If you have funds that you want to invest in debt instrument like fixed deposits, then this is the time. The chances are that these are the ideal fixed deposit schemes that you will get in the upcoming future. So, make the most of it.

How To Optimize Your Fixed Deposit As An Investment Tool

When you have an investment portfolio, you can’t be opinionated about investment tools. You should consider the pros and cons of each and make the best use possible. For example, there are several finance professionals who may suggest that fixed deposits are not beneficial. It is true that they have much lesser returns on investment than other investment tools like mutual funds. However, if you are building an investment portfolio, you would need to make some investments in low risk tools too as all high risk investments may not turn out to be profitable. There are other ways in which this product is helpful though.

• Invest for emergencies: Most people cannot anticipate every kind of emergency. For such situations, the safest, most rewarding & ideal investment would be fixed deposits . It offers higher returns than a savings account. While it is much lower than mutual funds and stock market, it has the highest form of liquidity besides a savings account. So, it continues to grow till you need it. If you plan to save and invest for this purpose, you must ensure that:

I. This is the best interest rate possible. Invest the right amount for the right period to earn the highest returns possible.

II. Ensure that the premature penalty is zero or very low since you use this financial tool to protect yourself against emergencies. Premature withdrawal penalties vary with every financial organization.

You must ensure that you opt for the best combination of the above factors for your investment. There are different ways to invest in this product, which are:

• FDs for low-risk investment: If you are a HNI (High Net-worth Individual), you are definitely in a position to take the risk. You have a substantial support system in place to protect you against major financial threats. Most retail investors, though, can’t claim to have this. So the question is can you risk losing it? If your answer is no, then high risk investment tools like the stock market or mutual funds may not be right for you. Fixed deposits, on the other hand, might be the most suitable choice instead. This low-risk low-gain tool is guaranteed to provide assured returns.

• Invest as a gift: While there are a few mutual funds that allow you to invest on a minor’s behalf, a FD is still a much better way to invest. If you find a good fixed deposit scheme that offers:

I. Best interest rate for the possible long term

II. Reinvestment of the annual returns option

Then you can easily invest in such a Fixed Deposit and nominate the child as a beneficiary to ensure that the said minor can use it for his/her education or wedding expenses.

Women Enjoy Lower Home Loan Rates In India

Most banks and finance companies have identified women as the next target group that they want to reach out to. While each organization has its own strategy, the common idea is to offer a discount on home loan rates to women , where a woman is:

• The sole applicant or co-applicant in the home loan
• Sole home owner or first home owner in case of joint ownership

The discount provided to the borrower with respect to the home loan rates varies with each bank or finance company. Overall though, this trend is on the rise. Female customers keen on lower housing loan interest rates can change a few details in their home ownership and loan application, and then contact organizations that are primarily driving this trend. It is expected that other organizations will be picking it up soon too. Adding to the appeal, many banks and finance companies are also presenting great value-add-ons to their home loan products such as additional discount in the processing charges.

The main cause of concern for borrowers here, though, is that these organizations claim this discount trend as a limited time offer for new home loan applicants. So, you cannot avail this particular offer unless you apply for it in the specific time frame.

Why are these lenders offering discount in home loan interest rates , if others in India are not offering it as a regular practice? It is believed that the last quarter of the financial year might be the reason for this opportunity. Most organizations may have a lower credit growth than expected. Plus, the non-performing assets (NPA) may seem to grow. So, lenders want to strengthen their retail lending by offering this chance to women; who associate high-value to their homes and are consistent in their repayments.

This strategy allows women and their families to avail a home loan at much lower rates and lenders can also tap into the target audience which is dependable when it comes to their repayments.

Overall, this discount can be used well by female customers to expand their real estate portfolio or to buy a home for the family. The time-constraints, however, imply that if you don’t have a seller, required documentation and a good credit history in place, this discount may not be as rewarding. This is because the lenders will check your repayment ability and other documents before considering you for this loan.

Importance Of Home Loan Rates In Your Monthly Cash Flow

EMI calculators calculate the EMIs based on three factors; the principal amount, the housing loan interest rate and the loan tenure. Out of these, the home loan rate is the most important one, as it is the only factor that can vary after you have started paying off the EMIs. Whether you have a floating or a fixed home loan rate , it will be based on the RBI rules and regulations, the profit margins and economy variables as well.

Due to the various financial challenges, it is likely for your EMIs to become the biggest deduction from your monthly earnings. This can be hazardous to your financial life for two reasons:

1. You may not have sufficient funds set aside for emergencies due to which you may end up losing your home because of the additional expenses.

2. Any external factor like a raise in the home loan rates in India can affect regular monthly payments such as EMIs, utility bills, grocery purchases and insurance payments. At times, it can imply that you won’t have sufficient savings for any other financial or medical emergencies.

If you understand the impact of the potential growth in home loan rates, you must ensure that your EMIs account for less than 30% of your monthly income. This will help to make certain that any possible increase in the housing loan interest rates can be dealt with easily.

It can be challenging to keep this percentage consistent throughout the term of your loan repayment though. However, it is the most strongly advised course of action. Fundamentally, there are two strategies that can help you get there:

1. You can work towards an increase in salary or your monthly business turnover, to stay ahead of this ratio.

2. You should make significant low-risk-higher-liquidity investments with whatever funds are left after all the expenses.

The most suitable type of investments for this purpose include SIPs in balanced or gold mutual funds, fixed deposits, recurring deposits, and gold and blue chip equities from stock market. These are realistic as they offer the right combination of liquidity and rewards. You can use them if you get into a situation where you can’t depend on your salary or business turnover to pay your EMIs. First time borrowers believe that home loans are about making the repayments by the set date. However, if you ask any financial expert, they would tell you that it’s much more about the financial discipline of setting enough money aside.