This Is How You Should Plan Your Investments After The Recent RBI Repo Rate Cut

After a long wait, the Reserve Bank Of India finally cut the repo rate by 0.25% last week, thus sending the stock market in raptures. However, just as all and sundry rejoice the rate cut, as soon as you open the morning newspapers or watch business news, are you left wondering, how does it impact your life, or does it at all? If you are baffled with questions like these, let us lend you a helping hand. Today we will tell you how this repo rate cut impacts you and what should you do if you are an investor or a prospective borrower.

What RBI Repo Rate Cut Means?
When the RBI cuts the repo rate it means banks get access to cheaper money, which translates into cheaper finance for you, but then again this is in theory. Don’t go marching in your bank demanding loans at cheaper rates of interest, at least not yet! Here’s what your investment strategy should be at this point in time. Otherwise, if you are scouting for home or auto loans, we have some suggestions for you too.

• Equities

2015 is clearly the year of the equities. With the inflation under control, the oil prices at a low, the fiscal deficit tamed, the Indian economy is certainly in a sweet spot and poised for growth. With the RBI cutting the repo rate on last Thursday, the going gets even better for the stock markets. With the bull phase that began last year, gaining pace now, it's time for you to look at equities if you haven’t done so already. If investing in equities directly is not your cup of tea, do so through the mutual fund route.

• Fixed deposits

Before the banks pass on the benefits of rate cut onto their customers, their first attempt will be to protect their own margins with cut on deposit rates. This will bring down your returns on bank fixed deposits and recurring deposits. The good news is that commercial banks have not cut the deposit rates yet; so if you are planning to lock in some money, now is a good time to do it, before the deposit rate cut cycle sets in.

• Bond funds

The debt market too is feeling the impact of the rate cut. The 10 year yield came down by 10 bps after the rate cut was announced on January 15. Bond experts are now predicting a further drop in the yield of the 10 year sovereign fund. Thus, while returns from short-term debt funds may be low, the long-term gilt funds and long-term tax free bonds look attractive at this stage. The Government issued tax free bonds delivered high returns of 18% last year. With more rate cuts expected, they should generate a similar kind of returns in 2015 as well.

• Auto loans

Auto loans are usually at a significant premium to the base rate of the banks. Thus, if you are planning to purchase a vehicle on a loan now, do bargain hard with your bank. Reduction in auto loan rates is much easier to be carried out as not too much of tinkering needs to be done on the base rate. Thus, you can expect cheaper auto loans going ahead in the year 2015.

• Your home loan strategy

There is a lot of noise in the real estate market, as people are predicting a fall in home loan rates. But it is for you to realize that firstly the home loan rate is closely linked to the base rate. So, the reduction in home loan rate at this time will be not more than 25 bps. If you are waiting to take advantage of the cut in interest rates, it is advisable to wait for a few more quarters over which more rate cuts expected. Wait till the borrowing rates are stable, and then make the move to scout for the lender who is offering the lowest rate of interest.

If you are looking to refinance your home loan, the same rule is applicable to you as well. However, consider a refinance only if you are in the initial years of the repayment schedule (2-5 years) as the interest component is bigger in this period. If you are already done with 15 years of your loan and the principal component is larger, refinance does not make much sense for you in the first place.

Thus, as you can see, a repo rate cut does impact the life of both potential borrowers and investors. While with some investments you may want to act immediately, if big loans such as home loans are on your mind--wait it out. Something better is likely to be in the offing!

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Rajiv Raj is the Director and Co-Founder of www.creditvidya.com