The RBI did not spring any surprises during its last monetary policy for the fiscal year by keeping the key rates unchanged. The repo rate (the rate at which the central bank lends to banks on short-term basis) remains at 6.75%.
Since the key policy rates are an outcome of how inflation behaves, despite a few domestic and global uncertainties, it has been in the range of 4 to 6% over the last six months; the RBI expects it to hover in the same range over the next few months and is not hawkish about inflation rising above 6%.
Now, all eyes will be on the Budget due later this month which would show where the economy is heading. The announcements would also be key for the future rate related decisions and the RBI would wait and watch before its next monetary policy announcement due post-Budget.
The home loan rates too are in the comfortable range of 9.50 to 9.75% with hopes for a year (2016-17) of good monsoon. The Centre’s growth oriented policies could bring down the interest rates further. The expectations are that, if the inflation can be controlled to under 5% consistently the rates could be cut further, and another 0.50% cut during the coming year may not be ruled out.
Such a rate cut would indeed bring down the lending rates to under 9% which would be good for new and existing borrowers. With lower inflation increasing the purchasing power and also low interest rate leading to more money in our hands, the overall economic situation looks positive. We will have to wait and watch how things would shape up.
Further, it is the season where many individuals who missed planning early for their tax saving under various Income Tax sections would be scampering to invest and get tax exemptions. While there are several options to invest to save taxes, one should not ignore tax saving equity mutual funds (ELSS) as part of their investing plan.
Equity Linked Saving Schemes are pure equity schemes that are locked for three years and provide exemption under Section 80C of the Income Tax Act. While all other options available under the same section are debt instruments and offer predetermined returns in the range of 8% to 8.75%, equity mutual funds is an option that has the potential to offer higher returns based on the past performances across fund houses.
Home loan borrowers can use this as an opportunity to build wealth over the time of their long repayment tenure and use the growth from such investments (in ELSS) to offset their interest cost. Investing even a fifth or Rs.30,000 of Rs.1.50 lakh provided under Section 80C would be worth considering. Consulting a financial advisor on this is recommended.
For new home loan borrowers, choosing floating rate would be ideal since reduction in interest rates would benefit them largely.
