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Explained: How SBI rate cuts will impact your savings, FDs, and home loans

The interest you earn from FDs and savings bank deposits will come down. New home loans will be cheaper, but existing home loan rates will not change immediately. The bank wants people to borrow more, and spend more.

Written by Sandeep Singh , Edited by Explained Desk | New Delhi | Updated: October 10, 2019 6:51:28 am
Explained: How will SBI rate cuts impact your savings, FDs, and home loans? On the lending side, the SBI announced that it would bring down MCLR (Marginal Cost of Funds based Lending Rate) by 10 basis points across all tenures. (File photo)

Taking off from the Reserve Bank of India’s (RBI’s) decision to cut the repo rate — the rate at which the RBI lends to commercial banks — the State Bank of India (SBI) on Thursday announced cuts in both the lending and deposit rates.

Lending rate is the rate at which commercial banks lends to customers. Deposit rate is the rate of interest that you get on your savings bank and fixed deposits with the bank.

On the lending side, the SBI announced that it would bring down MCLR (Marginal Cost of Funds based Lending Rate) by 10 basis points across all tenures.

On the deposit front, the bank announced that it would cut the interest rate on savings bank deposits from 3.5 per cent to 3.25 per cent.

It also reduced the term deposit rates for both retail and bulk deposits by 10 basis points and 30 basis points respectively for tenures of 1 year and less than 2 years. All the changes will are applicable from October 1, 2019.

Why has the bank taken these decisions?

Experts say that both the decisions are aimed at pushing consumption in the economy, which is the biggest concern at the moment.

While a cut in the lending rate would push borrowing by individuals from banks, the cut in deposit rate may discourage savings into bank deposits, and thereby push spending.


Lender hopes to boost consumption amid slowdown

SBI’s decision to cut both the lending and deposit rates may nudge people to borrow more and spend more at a time when the economy is facing a consumption slowdown. However, the issue of transmission of RBI’s repo rate cut into lending rates remains a major concern. While the bank slashed the deposit rates by up to 30 basis points, the lending rates have been brought down by only 10 basis points. The cut in MCLR may not immediately benefit the floating rate home loan customers of the bank. It remains to be seen as to what other banks and HFCs do.

Will this bring down your home loan rate?

A cut in MCLR would mean that fresh loans from SBI would now be available at a lower interest rate. However, the existing floating rate home loan customers of the bank will have to wait for their reset period.

SBI’s floating rate home loans are linked to its one-year MCLR, and it has a one-year reset clause. So while the one-year MCLR has been brought down to 8.05% from 8.15% with effect from October 10, 2019, the interest rate for existing floating rate customers will be reset at the end of one year from the date of first disbursement of the loan on the basis of prevailing 1 year MCLR as on the date of reset.

Which means that if the reset clause is in September and the MCLR cut is in October, then the home loan rate will change only in August 2020.

And how will your deposits be impacted?

The decision to cut the savings deposit rate by 25 basis points (100 basis point is 1 percentage point), and to cut the term deposit rates by 10 and 30 basis points come as a big dampener to conservative investors who put their money in bank FDs.

The bank has, however, only reduced the rates for small term deposits of less than 2 years, which experts say could be aimed at encouraging consumption in the economy instead of people just keeping money in the bank.

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