How Will the Repo Rate Cut Impact Investments, Loans & Savings? | Personal Finance Weekly #008

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Welcome to this week’s edition of Personal Finance Weekly! Our mission is to simplify personal finance, empowering you to make smarter choices that align with your life goals. With the right guidance, including advice from a qualified financial advisor, navigating your financial journey can become stress-free and rewarding.

Every week, we bring you insights, tips, and strategies to support you at every step of your financial journey.

This week, we’ll explore:

1. Repo Rate Cut After Five Years: How it Will Impact Investment, Loans and Savings?
2. Mastering your Credit Card.
3. Wedding Budget Planning.

1. Repo Rate Cut After Five Years: How it Will Impact Investment, Loans and Savings?

The Reserve Bank of India (RBI) cut the repo rate by 25 basis points (bps) to 6.25% on February 7, 2025. It was the first rate cut in nearly five years. How will it impact your investments, savings and loans? Let's explore.

Impact on Debt Funds

When interest rates fall, bonds held by debt funds, especially those with old bonds with high coupon rates, become more attractive. This is because they offer higher interest rates than newly issued bonds. This pushes the prices of dynamic bonds higher, which in turn increases the debt fund's Net Asset Value (NAV).

Remember that the extent of the benefit of a rate cut will depend on where you invest.

Long-duration funds focus on bonds with longer maturities, making them particularly sensitive to interest rate changes. When rates decline, these funds stand to gain the most. Why? Because they hold bonds that continue to pay higher interest rates for an extended period. This results in an uptick in bond prices, enhancing these funds' Net Asset Value (NAV). Thus, investors can expect considerable short-term gains when rates are reduced.

Short-duration funds invest in bonds with shorter maturities; the impact of a rate cut is generally less pronounced than long-duration funds. Their shorter time frames mean that the bonds mature faster and are reinvested at the new, lower interest rates more quickly, making them less reactive to falling rates.

Impact on Home and Auto Loans

A rate cut is usually beneficial for borrowers. If your loans, whether they are home loans or auto loans, are tied to the repo rate, this rate cut is expected to make those loans cheaper, allowing you to save more.

While you may anticipate a decrease in your monthly EMIs, banks typically prefer to keep the EMI unchanged and instead reduce the loan tenure. A shorter loan tenure means you pay off your loan faster and pay interest on the principal for a shorter period. As a result, you will save more on interest and clear your debt more quickly.

However, if you want to reduce your monthly EMI burden, you can ask your lender for that option as well.

When can you expect the changes in your loan tenure? Borrowers with repo-linked loans may notice the advantages within two to three months. However, it is important to remember that banks do not always immediately implement the full repo rate cut. In tight liquidity situations, some banks may delay reducing their rates.

Impact on Fixed Deposit Investors

The rate cut is bad news for fixed deposit investors. Banks typically reduce fixed deposit interest rates after a repo rate cut. We are approaching the end of the rate cycle, and banks are expected to cut fixed deposit rates soon. Therefore, if you want to invest in fixed deposits with high interest rates, you should lock in your rates before they drop.

This is just to give you an idea of how the rate cut will impact your investments or loans. Before making any financial decision, talk to a qualified financial advisor.

2. When it comes to credit cards, there is no one-size-fits-all solution.

Navigating the complex landscape of credit cards is not just about managing finances—it's about turning everyday spending into rewarding experiences. Understanding the ins and outs of your credit card can have substantial benefits for your overall finances.

Why Comprehensive Credit Card Knowledge is Crucial Credit cards are more than just tools for spending; they are gateways to financial flexibility and rewards. Proper usage can enhance your credit rating, provide significant cashbacks and rewards, and help manage cash flows more efficiently. However, the misuse of credit cards can lead to spiralling debt and financial stress.

• Impact on Credit Score: Responsible usage boosts your credit score, improving eligibility for better loan terms and interest rates.
• Strategic Spending: Leveraging cards for everyday purchases can maximise returns through rewards programs, without accumulating unnecessary debt.
• Balancing Acts: It is crucial to balance the perks against potential fees and to ensure that benefits like cash back or travel rewards align with your spending patterns.

Effective Credit Card Management Techniques To truly master your credit card usage, consider these tailored strategies:

• Assess Your Spending: Start by analysing your typical spending patterns. Where do you spend most frequently? Which categories (e.g., groceries, fuel, dining out) dominate your expenses? This insight helps in selecting credit cards that offer the best rewards for these categories.
• Optimise Card Usage: Don’t just stick to one card. Different cards offer various benefits, so use each card where it yields the most benefits. For instance, use one card for dining that offers high rewards on restaurants and another for travel.
• Annual Fees vs. Rewards: Always evaluate whether the rewards and benefits from a card outweigh its annual fees. Sometimes, paying an annual fee might be worth the extra benefits and higher reward points you receive.
• Explore Lesser-Known Benefits: Many cardholders overlook benefits such as extended warranties, purchase protection, travel insurance, and concierge services, which can save money and offer convenience.

Recent studies reveal that while a large segment of the Indian population uses credit cards, many are not fully aware of optimising their benefits. From choosing the right card based on spending habits to using credit card combos for maximising rewards, the nuances of credit card use are vast.

Eighty percent of credit card holders don’t fully capitalise on their cards' potential. Join the 20% who maximise their benefits by utilising our scoring and ranking tool. Enhance understanding about your credit card and make informed choices that align with your financial goals. Ready to optimise your credit card usage? Our Credit Card Scoring System helps you refine your search, maximise benefits, and assess how well your cards align with your financial needs.

3. Wedding Budget Planning

Indian weddings are a lavish affair that sees families spending twice as much on matrimonial ceremonies as on education. This booming $130 billion industry is only surpassed by the food and grocery sector, underscoring the deep cultural and emotional significance of weddings in India.

We explore the reasons behind the extravagant costs of these grand celebrations, often lasting multiple days and becoming a status symbol for many. Our discussion with Pratik Kedia, co-founder of The Wedding Ties, sheds light on:

• The typical cost range for Indian weddings.
• Common budgeting errors that families should avoid.
• The influence of cultural differences on wedding expenditures.
• The financial aspects of destination weddings.
• The impact of rising costs and emerging trends in wedding planning.

Join us as we unpack the complexities of wedding spending in India and provide insights into making smart financial decisions for your big day. Watch the full video here.

Whether you’re just starting or looking to level up your financial game, we are here to guide you every step of the way.

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