The Reserve Bank of India (RBI) Yesterday slashed the Repo rate by 25
Basis points(0.25%) raising hopes of cheaper home loans and EMI,s while
CRR (Cash Reserve ratio) is Unchanged.
Simply the neutral Real interest is estimated level of interest rate
at which the economy is growing under the controlled inflation, and it
also gives the indication about monetary policy at any point of time
whether it is too tight or loose. It is a famous variable to judge
whether monetary policy is on the right track or not.
Now back to the decision on the Repo Rate –the rate at which banks
borrow money from the central bank. The Repo Rate has been reduced to
6.25% from 6.50% by newly constituted MPC (Monetary Policy Committee)
headed by the newly elected RBI Governor (DR. Urijit Patel).
The major impact on the masses by the reduction in policy or repo
rate signifies that the bank will get cheaper funds from the central
Bank, so that the cost of Borrowing will come down (similarly cost of
production to any Manufacturer) , as well as the bank will reduce the
Base rate which leads to lower lending rate, it means people and
business firms will borrow more money due to slackness in the lower
interest rates.
Everyone wants to grow their money, keeping the money in the bank is
attractive for the consumers, when interest rate is high. If there is
lower interest then people will not park their money in the banks.
Therefore consumers start to look towards investments with higher
returns. So here stock markets and Business firms come in step . People
start investing into shares. So that Business firms and corporate have
more money and they are also comfortable in the borrowing from the
Banks. So they start investing money in the new projects, which helps in
job creation as well as strengthen in economy.
Controlling Money Supply through increase or decrease in Repo rate:
In case of high inflation, RBI will increase the repo rate to absorb
the money supply from the market. But in the case of low inflation, RBI
Lower the interest rate to increase in money supply.
Conclusion: Now the RBI decreases the repo rate the
interest rate which banks have to pay RBI reduces. They in turn provide
to the benefit to the consumers to lowering the interest rates. It will
creates very good borrowing environment, particularly for Retail
customers and higher demand for mortgage’s and personal loans. This is
good time to buy home, car etc.
