Though the Reserve Bank of India (RBI) decided to keep policy rates unchanged in its fifth bi-monthly monetary policy meeting, borrowers can expect banks to marginally lower the interest rates on loans as the transmission of earlier rate cuts is yet to take place. But this may also mean a slight reduction in fixed deposit (FD) rates.
The policy rates have come down by 135 basis points (bps) between February and October 2019, but the loan rates have come down only by up to 44 bps, said RBI governor Shaktikanta Das. Before lowering the policy rates further, RBI wants to wait for transmission of the previous rate cuts. “The 135 basis point (bps) rate cut should be reflected in the lending rates,” said Das.
While there was not much for borrowers and savers in the monetary policy statement, all eyes are now on the upcoming Union budget. There are expectations that personal income-tax rates would be lowered, leaving more money in the hands of the common man, and even RBI seems to be waiting for some indication on how the government plans to arrest the slowdown. “The forthcoming Union Budget will also provide better insight into further measures to be undertaken by the government and their impact on growth,” said Das.
Slight reduction in rates
While the transmission has been slow, economists believe that loan rates can fall up to 40 basis points over the next two quarters. “There is a deposit side on a bank’s balance sheet, which is still fixed at a certain rate. Each time, there’s leeway to reduce rates, banks pass it to retail borrowers,” said Rajni Thakur, economist, RBL Bank.
Thakur, however, added that the transmission won’t be drastic. “The average home loans rates in the market at present are around 8.3-8.4%. The 10-year government securities (G-Sec) are at 6.40-6.45%. Banks are lending at mere 200 bps above the government borrowing rate for all the risks they take. The spread (200 bps) shows that much of the transmission has happened,” said Thakur.
If the lending rates see a downward revision, so will FD rates. Both the rates are linked as banks have to balance their asset and liabilities.
Another economist at a private bank, who did not want to be named, pointed out that about 15% of home loans are still on base rate, which is on an average 150 bps higher than the marginal cost of funds-based lending rate (MCLR). Borrowers who have home loans on base rates should look at switching to external benchmark-led rates. “There are many online calculators which can help you. Look at rates linked to external benchmarks for new customers and compare it to your prevailing rate. Either talk to the existing lender or switch banks to lower your home loan liability,” said Adhil Shetty, CEO, Bankbazaar.com.
The next step
Given the current slowdown, people are expecting the government to take steps to help put more disposable income in the hands of individuals, which will, in turn, fuel the economy.
With RBI providing no respite to individual investors, expectations have now shifted to the upcoming budget. The recent cut in corporate tax rate has raised hopes of a similar cut for individual taxpayers. “The government is in a tricky spot with lower tax collections from both direct and indirect taxes and also a slowing economy. Tax collections are low and maybe will be lower in the coming quarters. However, some intervention may be required through tax cuts that can put more money in the hands of consumers to allow revival in at least some sectors of the economy,” said Archit Gupta, founder and CEO, ClearTax, a tax filing and investing portal.
In last year’s budget, the government gave respite to marginal taxpayers by enhancing tax rebate under Section 87A to ₹12,500, which effectively meant taxpayers having net taxable income of up to ₹5 lakh had to pay no tax. Some experts also believe that this time the government should rationalize the tax rate in a way that taxpayers across all income slabs benefit. “To boost consumption, the government can certainly tweak the slab rates to benefit individual taxpayers, particularly the middle class, as they did not benefit much earlier,” said Sandeep Sehgal, director, taxes and regulatory, Ashok Maheshwary & Associates, a chartered accountancy firm.
However, most experts said that the government doesn’t have much elbow room to reduce the tax rate substantially. “Right now, it would be unwise to expect an across-the-board rate cut,” said Gupta. According to Shailesh Kumar, director, Nangia Andersen Consulting Pvt. Ltd, a business tax advisory firm, “Low GDP growth forecast reduces the room for further cut in the income tax rate,” said Shailesh Kumar, director, Nangia Andersen Consulting Pvt. Ltd, a business tax advisory firm.
Before the government takes the leap to reduce tax rates, it will have to assess how it would provide for the deficit that such an announcement is bound to create. In the last budget, to overcome the deficit due to increase in tax rebate, the government enhanced the surcharge rate from 15% to 37%. This, effectively, raised the highest tax slab rate from 35.88% to 42.74%. “Disinvestment revenues may be one of the temporary solutions. Taking measures to improve GST collections and to plug tax leakages could be another area the government may explore,” said Kumar. “In the short run, the government may have to rely on revising indirect tax rates upwards as well as increasing non-tax revenues,” said D.K. Srivastava, chief policy advisor, EY India.
It’s a tightrope walk for RBI and the government. For now, RBI has chosen to pause the rate cut, while keeping an accommodative stance, to tackle inflationary pressures. So all eyes are now on Budget 2020.