Bank rate cut: What does it mean for you?

On April 8th, some of the leading banks namely Axis, SBI, ICICI and HDFC announced base rate cuts by 15-25 basis points (bps). 1 bps is one-hundredth of a percentage point. During the first bi-monthly monetary policy review on April 7th of the Reserve Bank, the rates remained intact. In fact, the central bank stressed the need towards better transmission of rate cuts, hinting banks to act fast.

Bank Rate Cut

Bank Rate Cut

Base rate is the minimum rate below which any bank can’t lend money.

Axis Bank Ltd will cut rate by 20 bps to 9.95 per cent from present 10.10 per cent. The change will be effective from April 13th. SBI and HDFC cut rate by 0.25 per cent from existing 10 per cent, effective April 10th and April 13th, respectively. ICICI Bank’s base rate will be 9.75%, down from 10% effective April 13th.

But what does it mean for you?

• A cut of 20 bps will reduce a home loan of Rs 50 lakh (interest rate = 10 per cent and tenor = 20 years) by Rs 496 per month.
• Generally banks lending loans at a floating rate calculate rate using the formula:

Base rate + margin spread

If base rate is 9.75 per cent and spread for home loan is 0.25 per cent, the interest rate comes out to be 10 per cent.

• There are times when banks just reduce tenor of loan and keep EMI outgo on floating rate intact. But one needs to check this with authorities.

• Only loans linked with base rate observe changes. Fixed rate EMI doesn’t witness any change. Personal and car loans (fixed rate) and interest on credit cards and consumer durable loans don’t change.

Ashish Pandey

I am a business and finance journalist who is currently employed at Financial Express and previously at Zee News. My areas of interest include business and foreign policy. You can reach me on Twitter at @ashuvirgo1984 or @eFundsPlus.

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