The recent interest rate cut by India’s central bank Reserve Bank of India (RBI) to the lowest in nine years has a given a mixed bag to NRIs.
The RBI cut its key interest rate by a quarter of a percentage point to 5.75% from 6% to boost economic growth, changing its monetary policy stance to ‘accommodative’ after the Indian economy grew at its slowest in over four years.
Victor Menezes, director, Growealth Syndicate, Dubai-based consultancy, said: “The direct impact is on the rate-sensitive real estate and auto sectors. For NRIs, the rate reduction may not have any significant effect, except for those who opted for floating rates on mortgage loans availed in India.
“Most other loans, including auto and personal loans, are normally availed at fixed rates.”
As the cost of borrowing goes down for banks, they tend to lower their respective marginal cost of funds based lending rate (MCLR), which is the minimum interest rate that a bank will charge on the loan and directly impacts the equated monthly instalments (EMIs). This means that home loans and car loans will become cheaper.
As it is the realty market has been bullish for some time owing to certain policy changes, weaker rupee and lower borrowing costs.
“Going forward, the market expects more rate reductions by the central bank in view of the projected sluggish economic growth, both globally and domestically. In fact, a further rate cut as high as 50 basis points (half a per cent) is in the offing, in which case, mortgage borrowers can expect a windfall,” Menezes said.
The flip side
The flip side is that banks and other financial institutions will reduce their deposit rates correspondingly, which will result in reduced interest on savings and fixed deposits.
Statistics show that there are more depositors than borrowers among NRIs. So, in effect NRIs do not benefit that much by this rate cut. However, indirectly, the benefits are derived in the form of a strong rupee and accelerated economic growth.
Deviating from its policy, India’s largest public sector bank State Bank of India announced introduction of repo rate linked home loans from July 1, 2019. The bank will pass on the 0.25% rate cut to its cash credit and overdraft borrowers.
Other banks are expected to slash their lending and borrowing rates accordingly. The effective repo-linked lending rate for cash credit and overdraft customers is 8%, while for savings deposits above INR100,000 the new rate will be 3%.
Fixed deposits have been traditionally the most preferred investment tool for average, low-income NRIs, though the returns are not attractive after adjusting for inflation rate.
Now that banks will reduce deposit rates, NRIs will be forced to look for other investment avenues. Investment advisers are busy exploiting this situation by suggesting new investment tools. Only a limited number of NRIs invest on professional advice.
However, Abhinav Roy, managing partner, Royal Associates, subscribes to the view that NRI investments will rise outside the property market.
“The stock markets are still bullish and select sectors will give better than expected returns in view of the positive outlook for the economy and NRIs find long term value in keeping invested in the Indian markets,” Roy said.
