Save, only then spend

With a recession-hit global economy threatening to power down India8217;s growth engine, the policy makers had little choice but to alter their monetary stance in favour of a softer interest rate regime. So far, despite RBI8217;s rate cuts, only a few banks have dropped lending rates, instead preferring to adopt a wait-and-watch policy see table: Banks8217; response. But more are expected to announce rate cuts in the coming days. 8220;Some banks have already cut their prime lending rates PLR. I expect others to follow suit soon,8221; says S. C. Sinha, executive director of state-owned Oriental Bank of Commerce.

Many banks might, however, wait a while before reducing their PLR, until they see definite evidence of a reduction in their cost of funds. 8220;Banks8217; margins will be under pressure. People will not accept lower deposit rates immediately. So it will take 4-5 months for this to play out,8221; says Harsh Roongta, chief executive officer, apnaloan.com, an internet portal for borrowers.

Relief for home loan borrowers

The biggest impact will be seen in the home loan space since that is the largest loan burden for most households. The December 6 repo rate cut will mean lower interest rates for home loan borrowers, though it is unlikely to translate into lower monthly instalments. According to Roongta, 8220;Most banks are likely to reduce the tenure of the loan rather than reduce the EMI. So RBI8217;s rate cuts won8217;t mean more money in the borrower8217;s hands. But reduction in tenure will reduce his liability by cutting the number of instalments he has to pay.8221;

New home loan borrowers will definitely reap the benefit of lower rates. 8220;I8217;m expecting home loan rates to drop by 50-75 bps,8221; says Sinha of OBC. Existing home loan borrowers too can take advantage of the fall in interest rates. 8220;If your home loan rate is higher than the current rates and you have a track record of paying your EMIs on time, you could ask your lender to lower your rate to the current market rate or shift to a lender who will give you a lower rate,8221; says Roongta.

Meanwhile, to prop up housing demand, the Indian Banks8217; Association IBA is trying to create a consensus among public sector banks to lower home loans rates for loans in the range of Rs 5 lakh to Rs 20 lakh by 200-300 bps. This could mean a lot of relief for borrowers whose loans fall within this bracket. 8220;The new rates on loans up to Rs 20 lakh should be in the range of 8-9 per cent,8221; says Sinha. At 11 per cent rate interest rate, a home loan of Rs 20 lakh for 20 years carries an EMI of about Rs 20,600. If banks lower rates, as proposed, the EMI for a similar tenure could well come down by more than Rs 2,000 to around Rs 18,000.

Cars get more affordable

An across-the-board 4 per cent cut in excise duty on all non-petroleum products should bring cheer to buyers. The automobile industry has decided to pass on the benefits to customers. Says Ashok Jha, President, Hyundai Motors: 8220;We will pass on the 4 per cent cut in excise duty fully to our customers.8221;

Companies like Maruti Suzuki, Hyundai Motors, Tata Motors, Mahindra 038; Mahindra and Hero Honda have all cut prices of passenger cars. The cut translates into a saving of Rs 8,000 for Maruti 800 and almost Rs 20,000 for a premium car like the Fabia. Mid-sized sedans like Ford Ikon, Honda City and Hyundai Accent, whose prices were in the Rs 5 lakh to Rs 7.5 lakh range, will now be available for Rs 4.5 lakh to Rs 7 lakh. Even duty on executive class cars is down from 24 per cent to 20 per cent, driving down prices of luxury cars like the Civic and the Corolla that cost between Rs 8 lakh and 13 lakh by a substantial Rs 32,000 to Rs 55,000.

Cheaper education loans

With the CRR and repo rates falling to 5.50 per cent and 6.50 per cent in the last quarter of this year, some banks have reduced their BPLRs and in turn other rates as well. Until October, education loans were roughly in the range of 13-14 per cent. They have dropped by 50 bps now. Says Roongta: 8220;Mostly it is public sector banks that offer education loans. And since these are directly linked to their PLRs, we have already seen a reduction. More could follow.8221;

Consumer goods prices to fall

An across-the-board cut in Cenvat for non-petroleum goods is likely to bring down the prices of consumer durables and FMCG like soaps, toothpastes, cold drinks, etc. Companies haven8217;t slashed rates immediately and are waiting to clear their earlier inventories. 8220;If we factor in the falling inflation rate 8 per cent for the week ending November 29, the fuel price cut by Rs 5 on petrol and Rs 2 on diesel, and the cut cut in Cenvat that will reflect in lower prices of FMCG and consumer durables, a household should be able to save at least 6-7 per cent monthly over the next few months,8221; says Surya Bhatia, a Delhi-based financial planner. 8220;Most companies are under pressure because of squeezed profitability. But going forward, we should see price cuts.8221;

While the interest rate cuts and price cuts together make for an attractive package, be warned. The economy is headed for tumultuous times at least for the next 12-18 months. Try to take advantage of declining interest rates and price cuts only if you have an adequate cash cushion. 8220;I think it is prudent to delay purchases for some time, unless they are urgent. Things are unlikely to become more expensive; prices should come down in a couple of months,8221; says Bhatia. 8220;In such extraordinary times, it is important to have liquidity. You may keep three months of your monthly expenses as cash and the same sum for another three months in liquid funds, or in instruments from where it is accessible in about 48 hours.8221; n

Banks8217; response

8226; HDFC Bank has lowered its PLR by 50 bps to 16 per cent

8226; Union Bank has cut its PLR by 75 bps to 12.5 per cent

8226; PNB slashed its benchmark rate by 100 bps on December 1, taking the total reduction to 150 bps in the last two months. The PLR now stands at 12.5 per cent.

8226; ICICI Bank has reduced its interest rate on floating home loan rate by 1.5 percentage points to 11.5 per cent for loans up to Rs 20 lakh.

suneeti.ahujaexpressindia.com