Impact of RBI rate cut on you

Last week, the Reserve Bank of India (RBI) slashed the key policy rate by 25 basis points (bps) for the third time in a row. One basis point is one-hundredth of a percentage point. The central bank also changed its stance from neutral to accommodative. Along with this the apex bank said that it would review the liquidity management framework, shortly provide app-based forex trading platform for retail participants and do away with charges for online fund transfer. Here is a look at how each of these changes will affect you:

So far this year, the RBI has cut repo rate by 75 bps. However, the transmission of the rate cut has been slow. Banks blame it on tight liquidity situation due to slow growth in deposits and systemic liquidity position in the economy. Last week, RBI decided to constitute an internal working group to review the existing liquidity management framework. The accommodative stance and the surplus liquidity in the near-term may help banks to reduce lending rates faster than the past few months.

Bankers say that you will see a change in marginal cost of fund based lending rates (MCLR) when the asset-liability committee of individual banks meets next time. A day after the policy, Bank of Maharashtra cut its lending rate—MCLR—by 10 bps. If you are a new borrower, shop around for better rates. If you are a depositor, you may want to lock-in your fixed deposits (FDs) in the current rates as FDs rates are likely to fall in the near-term.

When the apex bank changed its stance from neutral to accommodative, the bond market cheered the move. You may want to consider short-term debt funds.

“The broad direction for interest rate is lower and the risk for an upward movement is substantially reduced. Opportunity will be in shorter duration funds where risk from fiscal doesn’t apply. We recommend investors to focus on short-term duration fund or dynamic bond funds,” said R Sivakumar, head- fixed income, Axis Mutual Fund.

There was a sharp yield movement in bonds after the RBI announcement on rate cut. “With the current stance of accommodative, the bond market may start factoring in probably rate cut and it is all subject to the inflation numbers. You may want to consider corporate bonds where you can enter and exit without the need to time it,” said Vidya Bala, head-mutual funds research, FundsIndia.com

Come August, you will be able to get your forex through an app from an online trading platform at the cheap rates. An electronic trading platform where you can buy and sell forex has been developed by the Clearing Corporation of India (CCIL) and is being tested by users, said the RBI in its monetary policy statement. You can use this app to buy or sell forex at market clearing prices.

“This platform would provide transparency of pricing,” said the apex bank in its statement. When you convert rupee to foreign currency, it is benchmarked to the interbank rate. Airport, banks, money changers and online portals that sell forex add a margin to the interbank rate. Margin is the money that they make on the conversion cost.

For instance, if you are exchanging currency at an airport, the exchange fee can range between 6% and 12% of the amount. Banks and money changers charge a margin of 2-3.5%. In case you buy from online forex platforms, the margins are up to 0.5% of the amount. With the launch of app-based trading platform, you will get forex at the lower margins.

The RBI has also decided to do away with all the charges on Real Time Gross Settlement System (RTGS) and National Electronic Funds Transfer (NEFT). “It has been decided to do away with the charges levied by the Reserve Bank for transactions processed in the RTGS and NEFT systems. Banks will be required to pass these benefits to their customers,” the RBI said in the monetary policy statement.

Broadly, banks allow you to electronically transfer money, through NEFT, RTGS and immediate payment service (IMPS). Through NEFT, you can send money during the bank’s working hours. Since the fund transfer happens in batches, there can be a delay in money transfer. RTGS happens in real time and gross basis and is meant for high-value transactions, minimum ₹2 lakh. Recently, the apex bank increased the timing for RTGS from 4.30pm to 6pm.

So far, the cost of transaction through RTGS depends on the time of transaction range from ₹2- ₹10. In case of NEFT, the fee was between ₹5 and ₹15 depending on the amount. Now you will not have to pay these charges.

First Published:
Jun 10, 2019 07:03 IST

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