Recently, in October this year, RBI had its meeting on which it cut the benchmark policy rate by 25 basis points. This rate is now just 5.15 percent. The RBI after this benchmark rate cut moved from calibrated tightening to neutral.
REPO RATE AND ITS DETERMINATION
Consumer Price Index or retail inflation in the country is the influencer of RBI’s policies. Therefore, according to the performance of the Consumer Price Index, RBI sets or decides the repo rate.
In simple words, the Repo rate is the rate at which banks borrow funds from the RBI when they need it. The interest that the bank pays on such liability (borrowings from RBI) is dependent on the repo rate. The suitable collateral that is required is also provided by the banks to borrow money.
When RBI increases the repo rate, it discourages the banks from borrowing because of high borrowing costs. As a result, the cycle of the burden that starts from here. Due to the high borrowing costs, banks transfer this burden on the public and increase the price of the loans for the public. RBI is responsible for controlling inflation in the country. Hence, it is compelled to increase the repo rate sometimes (due to the inflationary situation) to lower the demand in the country.
On the other hand, if the repo rate is cut down by RBI, it signifies that the prices are under control, and there is no problem in the economy in this matter.
The effects that this rate cut down had on the companies, individuals, & firms need to be considered. Hence, there are some of the impact written below-
Effect on Companies
When the repo rate is on the lower side or when it is reduced, the borrowing rates from banks also reduce. Hence, it becomes easier and more attractive for companies to borrow from banks. They now get loans at cheaper rates; hence, they borrow more to expand their businesses or to invest.
Effect on Individuals
When it comes to our notice that repo rates have been reduced, we get happy & are in a mood to celebrate. This is because we think that now we would also be able to borrow from banks at cheaper rates. But, unfortunately, this is not the complete truth. Home loans, personal loans, and vehicle loans’ interest rates don’t get affected much.
The main reason behind this fact is RBI’s control of benchmark rates. It strictly controls these rates, and sadly, floating-rate loans are also attached to these benchmark rates only. So, ultimately, when the repo rate goes up, the rate of interest on loans also goes up but, when the repo rate comes down, there is not a steep decline in the loan rates.
Therefore, it is observed that investing in real estate is a viable option after this rate cut.
Low Inflation
It was announced in the new budget that the inflation this time was the lowest. It was at 4.6 percent, which is the minimum for any government tenure. Indian products give more competition to international products during such situations because prices of Indian goods & services either don’t rise or rise at a very slow pace. Due to this cycle, exports rise & helps in maintaining or rather improving the trade balance of the country.
If we consider firms, they benefit from such situations. They are sure & able to invest more in their businesses, which is visible in future prices & wages. If the firms have enough time, they do not have to worry about updating their price list now and then. This is only possible when prices rise or decline at a slower pace providing ample time to the firms. It saves energy, costs, and time of the firms.
Additional Read:- Tax Benefits and Other Advantages of Joint Home Loan
Hence, just as a coin has 2 sides, the rate cut is also good for some & bad for others.
