Last week, while discussing interest rate scenario, I had concluded on the premise of expert opinions that the Reserve Bank of India’s (RBI) in its bi-monthly monetary policy ‘would likely go for hike in the policy rate’. But the RBI’s Monetary Policy Committee (MPC) in a surprising move decided to maintain the repo rate unchanged at 6.5%. Precisely, the RBI decide to not increase the repo rate, when hike was widely expected by many economists, analysts and observers.
Interestingly, RBI’s stand on key interest rates not only keeps experts alive with their predictions and analysis, it has over a period of time attracted common man’s attention. Actually, it is the fast financial intermediation even into unreached areas which has changed the economics of thinking preferences of one and all. Now people keenly follow every spell of stance of monetary policy whenever the apex bank announces it. People today are keen to know more about percentages of cash reserve ratio (CRR), Repo & Reverse Repo rates than the prices of essential commodities.
Technically speaking, any policy rate cut means a relief to the people. Does this rate cut actually percolate down to customers? A Reserve Bank of India report has found banks were not passing benefits of changed repo rates to customers. This means, as stated by an NGO, Moneylife Foundation, in a plea to the Supreme Court that “banks and financial institutions implementing interest directives has been arbitrary and discriminatory and in violation of a citizen’s fundamental rights under Article 14 (right to equality) and 21 (right to life) of the Constitution.”
When we look at the rate cut scenario, we find these rate cuts ‘useless’. I still remember a small home loan borrower cursing ‘fake rate cut’ policy. He was enthusiastic when some time back he heard finance minister Arun Jaitely that EMI of home loans, auto loans and other loans will come down following the policy rate cuts. The borrower had taken a home loan from a bank with repayment schedule of 11 years. He had been paying EMIs for the past 5 years now. During the repayment period, his EMI was raised on several occasions when the RBI had hiked some key policy rates. Now, when the RBI had announced cut in policy rates, his EMI didn’t come down the same way and at the same pace when it was previously raised. So, the borrower had a reason to call these rate cuts ‘useless’.
Notably, most common mode of expecting banks to cut their lending rates is cut in repo rate. But for a common borrower it hardly happens despite the RBI cutting repo rates (the rate at which RBI lends to banks) on a few occasions. Even there have been occasions when keeping the policy rates unchanged, triggered hike in interest rates.
In the context discussed above, now there is an interesting development. A few days back, the Supreme Court in response to a plea brought by Moneylife Foundation, has asked the RBI to examine within six weeks whether repo rate benefits were being passed on to customers. The NGO had pleaded and seeking direction in this regards from the apex court.
It further sought that banks and financial institutions be directed to publish the methodology of setting the rate of interest and particulars on their websites on a weekly basis.
Now, the Supreme Courts intervention is this matter would be worth watching as banks would be left with no option but to fall in line with the direction.
Meanwhile, in a rate hike scenario, it’s important for the borrowers to negotiate the impact. The key lies in managing money. And managing money is not a big deal. But what is required is to raise loans only for necessity and not for luxury.
At the same time one should develop habits of saving money. There are two things that may have kept many of us at bay for developing money saving skills. Either we were never really taught how to manage money, or maybe we simply avoid thinking about it because the situation is so dire. But the dire need is to incorporate some simple money management habits and have a greater awareness of money.
Remember, cutting back on your day-to-day expenses and resisting temptation makes it much easier for you not only to avoid raising a loan for owning luxury life style, but will help you to save something for rainy day.
(The views are of the author and not that of the institution he works for)
sajjadbazaz@greaterkashmir.com