Interest Rates in India
How the interest rate on your loan is determined?
There are many factors that affect the interest rate that you have to pay on a loan such as credit scores, collateral and so on. The following are the few factors that determine the interest rates:
1. Relation between Credit Score and Interest Rate
Credit scores are taken into account while setting interest rates and the borrower with a better score gets a lower interest rate on a loan.
2. Secured Vs. Unsecured Loan and Rate of Borrowing
When a loan is secured by collateral, the risk of default by the borrower decreases and hence the risk premium charged may be lower, reducing the rate of borrowing.
3. Tenor and Interest Rate
The shorter the tenor of the loan, the lower the risk, since the ability of the borrower to repay the loan is less likely to change and hence lower the rate of interest.
4. Account Conduct and Rate
Loan pricing also takes into account the conduct of accounts in past year in terms of regularity of repayment for repeat borrowers.
5. Competitive Rates
Competition pricing in terms of what the other lenders are charging for the same facility also determines the interest rate.
What determines Interest Rates?
There are several factors which could determine the outlook for interest rates. Besides the overall outlook, it is visualised that the pattern and structure of interest rates in different market segments will come under the influence of certain changes in policy environment.
First is the likelihood of further policy rate revisions upward. Third is the possible change in monetary operating procedures.
The most significant factor determining the outlook for interest rates is policy rates. Reserve Bank of India on Friday cut its policy repo rate by 25 basis points, or a quarter of 1 percentage point.The fifth consecutive rate cut in the past eight months came with an assurance of an accommodative stance till growth revives, suggesting more cuts down the line, but there was also a bit of downbeat news.
The central bank sharply cut the GDP growth projection for FY2020 from 6.9 per cent (made in its August policy statement) to 6.1 per cent.
Transparency can be enhanced to guide market expectations by certain additional measures. First, a calendar of State governments’ borrowing programme can be announced. Second, a clear roadmap for implementation of the Mohanty working group recommendations can be laid out. Third, banks should be instructed to place their methodologies for determination of base rates in public domain. Fourth, the RBI should resume its practice of placing on its Web site, the actual lending rates of banks on a quarterly basis.
Who determines the Interest Rate in India?
In India, the Reserve Bank of India determine the bank rate, which is the standard rate at which it is prepared to buy or re-discount bills of exchange or other commercial paper eligible for purchase under this Act. (R Act 1934 sec.49) The Reserve Bank of India also provides short term loans to its clients (keeping collateral) at what is called the repo rate. This rate is revised periodically. However, there is no predetermined schedule. The repo rates are changed reactively depending on the economy. As in other countries, repo rates affect the money flow into the nation’s economy and affect the inflation and commercial banks’ lending or interest rate.
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