Professional Documents
Culture Documents
Interest Rates
&
How to decide Fixed v/s Floating
Interest Rates?
TakeBestLoans.com
Index
Definitions
TakeBestLoans.com
TakeBestLoans.com
TakeBestLoans.com
Here are the tools Reserve Bank of India (RBI) uses to influence the economy of a
country.
Repo rate- When the economy is bottomed out RBI decreases the repo rate so as to
decrease the base rate of the banks. So lets say the 12% interest rate loan is available
for 10% now. Imagine you have a home loan which had a 20,000 EMI, now it only costs
you 15,000 per month. This hikes the demand for loans as they are cheaper now. Vice
Versa, in a scenario where the inflation in country is high RBI increases the repo rate
which shoots up the base rate of banks. So the 12% jumps to 14%. So your home loans
which cost you 20,000 EMI earlier now costs you 25,000. In this case fewer people
will opt for housing loan as it is more expensive now. Similarly in the economy as whole
demand for goods & services drops down because of less money supply in the
economy. Now fewer people have capacity to purchase commodities without those
costly loans. This results in drop in demand for commodities and thus helps reducing
inflation.
TakeBestLoans.com
TakeBestLoans.com
SLR and CRR are used to control flow of money in the market and for contingency
purpose.
Since 2011 the SLR and CRR has also been decreasing from 24% and 6% to 22% and
4% in 2014 respectively.
TakeBestLoans.com
10
TakeBestLoans.com
Aug 2014
Jul 2014
Jun 2014
May 2014
Apr 2014
Mar 2014
Feb 2014
Jan 2014
Dec 2013
Nov 2013
Oct 2013
Sep 2013
Aug 2013
Jul 2013
Jun 2013
May 2013
Apr 2013
Mar 2013
Feb 2013
Jan 2013
Dec 2012
12
Nov 2012
Oct 2012
Sep 2012
Aug 2012
Jul 2012
Jun 2012
May 2012
Apr 2012
Mar 2012
Feb 2012
Jan 2012
Dec 2011
Nov 2011
Oct 2011
Sep 2011
Aug 2011
Jul 2011
Jun 2011
May 2011
Percentage %
10
24
MSF
23.5
Repo Rate
23
6
22.5
2
21.5
0
21
11
Reverse
repo
CRR
22
SLR
In the graph we can see the repo rate is above WPI through out and repo falls when
WPI goes down and vice versa.
TakeBestLoans.com
12
TakeBestLoans.com
13
10
Repo
Rate
WPI %
4
CPI %
2
TakeBestLoans.com
14
2007-08
9.32
2008-09
6.72
2009-10
8.59
2010-11
8.91
2011-12
6.69
2012-13
4.47
2013-14
4.74
0.00
2.00
4.00
6.00
GDP Growth %
TakeBestLoans.com
15
8.00
10.00
Since December 2013 the repo rate has been increased even though there is
slight increase in GDP.
The Reason for not decreasing repo rate is, RBI is more focused on controlling
inflation for the benefit of common man.
TakeBestLoans.com
16
10
Repo Rate %
TakeBestLoans.com
GDP %
17
Conclusion
The bank interest rate will change when repo rate changes.
It is expected that RBI may soon decrease the Repo Rates in 2015 (hence loan
interest rates should also come down eventually in 2015)
So it is currently desirable to go for floating rates rather than fixed rates for
taking any loan.
Besides, there are currently no pre payment penalties for floating rate
housing loans
If you have taken fixed rate loan, when the repo rate goes down (base rate of
bank may reduce and hence also the loan interest rates) you will be paying
the same interest rates (rather than lower interest rates).
TakeBestLoans.com
18
More Info
https://www.takebestloans.com/
DISCLAIMER
All materials, information, products and services are provided "as is," with no warranties or guarantees whatsoever. Information in this PowerPoint, unless specifically promised or warranted to be correct, is not promised or guaranteed to be
correct, current, or complete, and while we make best effort to ensure accuracy of the information, data and content, this PowerPoint may contain technical inaccuracies or typographical errors. We assume no responsibility for updating this
PowerPoint to keep information current or to ensure the accuracy or completeness of any posted information. Accordingly, you should confirm the accuracy and completeness of all information before making any decision whatsoever.
TakeBestLoans.com
19