The monetary policy committee of the Reserve Bank of India (RBI) reduced the repo rate by 25 basis points (bps) to 5.75 percent, the lowest it has ever been since 2010. Let’s understand the implications of this move on the common man.
What is Repo Rate?
The RBI lends money to commercial banks in the event of any shortfall of funds. The interest rate at which the RBI lends is called the repo rate.
What Does a Slash in Repo Rate Imply?
When the cost of borrowing goes down for banks, they are able to lower their respective minimal lending rates.
This is good news for borrowers as it could mean cheaper home loans, car loans, etc. EMIs (Equated Monthly Installments) are also likely to go down, assuming banks will pass on the benefit of the rate cut.
However, this won’t do much good for senior citizens dependent on income from fixed income instruments. This is because interest rates on fixed deposits depend on several other factors such as liquidity in the economy and interest rates of post office saving schemes, apart from RBI’s repo rate.
Borrowers can hope for more rate cuts in the future as the monetary policy stance has been changed from neutral to accommodative.