The Reserve Bank of India (RBI) has taken everyone by surprise in its annual monetary policy for 2012-2013. Between March 2010 and October 2011, the RBI had hiked policy rates 13 times and everyone was baying for a slash but not to the extent it came.
The latest cut signals the fact that RBI is keen for a sustaining growth of the economy at the cost of the inflation monster. The inflation for March 2012 stood at 6.9% while in the last 40 years it is at 8%.
The policy rates were slashed by 50 basis points when the expectation was only 25.
As a result :
The repo rate is now at 8% down from 8.5%.
The reserve repo rate is at 7% down from 7.5%
Repo rate is the rate at which RBI lends to banks and reverse repo rate is rate at which it borrows from the banks.
The decision was cheered by the business fraternity in India and almost all the banks agree that the lending and deposit rates will eventually come down. That means cheaper loan rates and will help in consumers buying more homes and cars.
RBI Monetary Policy
Prepayment penalty on home loan goes !
In the last one year, RBI had been requesting banks to scrap the prepayment penalty charges on home loans. While housing finance companies had obliged, only some banks caved in.
State bank of India scrapped the charges first for both fixed and floating rate home loans and other banks followed suit. However, not all banks obliged.
The RBI diktat now ensures that there is no prepayment penalty on floating rate home loans.
What RBI Monetary Policy means is that the investor now is free to move across lenders to take advantage of a lower floating home loan rate. Earlier, banks could charge a penalty if you decided to move to a new lender. This will also ensure that the floating home loan rates are competitive across lenders.
Also, exiting and new borrowers will get the same home loan rate. Fixed home loan rates may also see the light of the day – as of now, there is nothing fixed for the tenure of the home loan – the banks reserves the right to revisit the rates after some years. That could possibly change in the future as well.
RBI Monetary Policy Guidelines on banking accounts
The RBI in its Monetary Policy has asked banks to allot a Unique Customer Identification Code (UCIC) by April 2013. For newer customers, at the time they are engaged with the bank. I suspect this will pave the way for savings account portability in the future.
This unique number will also be able to identify different products which one customer bought from the banks.
Banks have also been asked to offer basic savings account to all customers. As of today, basic banking is not really made available to everyone. Although it will now change. The savings account will not have any minimum balance as banks usually ask for. RBI will issue the guidelines on this shortly – so a zero balance savings account with minimum facilities like cheque books and ATM card will be at our disposals.
Banks have also been asked to frame policies on better grievance redressal mechanism to quickly resolve complaints.
In RBI Monetary Policy, my view is that these are customer friendly measures that the RBI is thinking of implementing.
I am about to take on a home loan so I am waiting for banks to slash the rates. What are your thoughts ?
Hi,
An excellent summary of the RBI’s recent policy action. To reflect it into investment decisions, the bond funds would provide a blasting returns to investors as the bond prices are inversely proportionate to the interest rate scenario. Some of the bond funds like BSL Dynamic Bond Fund have already shown returns to the tune of 30% plus in last week owing to the reduction in interest rates.
With regards to saving banks – I am very eager to see how banks actually convert the basic banking into reality. Providing minimum balance free accounts would come at a cost to the banking industry which may result in raising the cost of banking for people at large ! Obviously some one would have to pay for free banking for all.
Regards
BFA
So apart from dynamic bond funds, what would you suggest ? How about FMPs and income funds ?
FMPs are best for equal maturity requirements. So a person wanting for just 90 days / 180 days requirements, FMPs are good. FDs are best suited for > 5 years duration, specially for 10 year duration. I love the compounding effect of FDs 10 years duration (check out http://insight.banyanfa.com/?p=103).
Regards
Banyanfa
Completely agree with BFA. Someone has to pay for the banking. In case of zero balance accounts I am sure other services related to such account will be charged like net banking charges, ATM charges etc. If they are already charging they might increase it but somehow banks will compensate for the loss.
@TheWealthWisher,
Excellent article, thanks for consolidating everything. I will be very pleased with banks offering zero balance, it will be a boon to customers, currently we have to keep minimum 5000 to 10000 in private banks.
Also prepayment penalty on home loans that’s also a very good move. Home loan rates will fall so will FD/RD rates. I think its right time to book an FD/RD, i am contemplating on the same. There are talks that the next rate cut will happen only in Sept, 2012.
Go with long term debt mutual funds, I am wanting to do an article on the same in the next few days.
@TheWealthWisher,
Thanks, i am already invested in HDFC Prudence and couple of MIP’s.
I want to protect my principal and want guaranteed returns hence thinking of investing in FD/RD.
I am eagerly waiting for the article. A few of my FDs will be maturing this year so I may look to invest in long term debt MFs rather than FDs, if ROI comes down.
So why will interest rates fall ? Last month they did some changes and short term FDs gained popularity. What’s the link between RBI’s lending rate and Fixed deposits ? I thought that now RBI is lending money at cheaper rates to Banks, so they’ll also increase the returns of FD’s as they can afford it and attract customers. Confused about why the interest rates have to come down..
There is an indirect relationship. Due to this move home loan interest rates can come down, which will affect FD rates as well.
Suppose a bank is giving home loan at 11% interest and FD at 9%. After RBIs move this bank has brough home loan to 10%. Now bank cannot keep giving 9% interest on FD when lending rate has come down. So, FD rates might fall to 8%.
Banks wants to maintain that margin of profit. So while they reduce home loan rates (money they are lending to you and me), to maintain that profit margin they will also reduce the rate of interest they are giving away on our investments with them – FDs. If they do not do this, they will have lesser margins of profit and they would not do that, would they !
I am relatively new here and reading all articles in this site. Very very informative and eye opening and easier to follow. Thanks.
One thot on zero balance account based on the other interesting article how many savings account one should have. In a way minimum balance works as some sort of deterrent or discipline not to hold 10-12 savings account. If 0 balance is allowed I will not close my defunct accounts.
Looking forward to the debt fund article.
Hey Dip,
That’s an interesting take. I didn’t look at it that way 🙂
I guess it’ll be tougher for banks as they have to send the bills and maintenance amounts for debit card..
In my opinion the number of savings accounts one should have is the number one can easily manage. The time and effort to manage numerous savings account is just not worth it.
Just because something is free doesn’t mean we must have it.
Try reading this –
https://www.thewealthwisher.com/2010/08/07/how-many-savings-or-bank-accounts-should-you-have/
ICICI and PNB reduced lending rates by 0.25% and FD rates by 0.5%. Good enough? Will it attract more home buyers?
I don’t think so, what do the fellow readers think?
http://zeenews.india.com/business/news/finance/icici-bank-cuts-lending-and-deposit-rates-by-0-25_46176.html
I second your opinion – it will not attract buyers. Note that some banks are not even thinking of cuts.
Some people who were already finalizing buy may decide to cave in as the attraction of the lowered interest rate helps but this is not a huge rate cut.
Was lucky to open an FD & RD with ICICI @ 9.25% couple of days back.
Why i choose the above instruments was to protect my capital and it was for a short duration.
So the banks who are planning not to cut home loan rates, I assume won’t reduce FD rates as well? Would they? 🙂
Oriental Bank will not reduce rates for now, that’s what one of the officers told me today.
All moves are welcome :).
Zero balance account would be a problem for bank. Though I think there are some banks who has minimum balance criteria very high, as far as I know few years back Deutche bank used to ask 30000 minimum amount, that’s too much. If it’s reduced to 2000/5000 then better.
I thought RBI has already announced – no pre-payment penalty for home loans few months back, I think I read it on ET. Not sure if it was just news that it’s going to happen.
Rate cut may not attract buyers, it makes one thing sure that the rate incremental phase is stopped for now and a positive sign that not to keep paying extra but pay little less :).
Home Loan Borrower
Reg ING VYSYA Prepayment waiver Policy
RBI POLICY on 17 Apr 2012
Housing Loan is on Floating Intrest rate basis prepayment can be done through any source
(i.e)
Investor now is free to move across lenders to take advantage of a lower floating home loan rate. Earlier, banks could charge a penalty if you decided to move to a new lender.
ING VYSYA POLICY on 18 Apr 2012
Poor Home Loan Borrower can prepay from their own source but prepayment done via switch over loan from ING VYSYA to other Banks 3% prepay charges are mandatory
This is the response from ING VYSYA Banking officers
What a POLICY sir ji
Vow, this is amazing !
Maybe you shoudl complain to the banking ombudsman.
Do you have a home loan that you are looking to switch over ?
What does it mean “Poor home loan borrower”? How do they define poor?
Even Today (i.e. January 31, 2013) Andhra Bank, Vivekananda Nagar Branch, Kukatpally, Hyderabad has refused in writing that they will not open a zero balance savings account, demanding Rs. 500/- as minimum account balance; likewise State Bank of India, I.E. Kukatpally, Hyderabad has confirmed on mobile, that they would open a Saving Bank Account with a minimum account balance of Rs. 1500/-.
They say they have not received any instruction from RBI nor Aadhar Card (UID) Authorities to open any ‘Zero Balance Saving Account, with no frills’ as has been published released by RBI to the Media, in April, 2012.
Why RBI issues media statements without issuing firm instructions to the Banks?
Why don’t you check with the banking ombudsman if you think this might help you ? I am sure they will point you in the right direction.
On another note, this might actually be true as the instructions might not have been formalized yet.