The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI)cut the repo rate by 35 basis point (bps) today. This makes it the 4th consecutive rate cut by the central bank. The repo rate now stands at 5.40%. The rate is now down by 1.10% since January 2019.
One bps is equal to one-hundred of a percent. Repo rate is the interest rate at which banks borrow from the RBI.
The cut comes on the back of slowing demand and investment which has affected the economy’s growth. The MPC also maintains the ‘accommodative’ stance. The accommodative stance means RBI may cut rates further.
As the repo rate is the rate of interest at which the banks borrow money from the RBI, a fall in the repo rate means that funds will be available to banks at lower cost.This allow banks to cut the lending rate. Marginal Cost of Funds based Lending Rate(MCLR) is the minimum interest rate below which the banks can’t lend to their customers.
Loans, whether it car loans or home loans, are now linked to the bank’s MCLR. A low MCLR translates into lower interest rate, if the banks pass on the cut to their customers. The move will benefit both existing and new borrowers as their monthly instalments will now be lower and the total interest that had to be paid will also come down.
Following the cut in the repo rate, SBI has quickly cut its lending rates. It announced a 15 bps reduction in MCLR across all tenures. The revised rate will be effective from 10th August. This makes it the fourth consecutive cut by RBI. The one-year MCLR rate now stands at 8.25% per annum, from 8.40% annum.
While a rate cut brings cheers to homebuyers, it is bad news for fixed deposits customers. It is especially hard for retirees who depend on the interest paid by their fixed deposits.
It is seen that in an event of a rate cut, the banks are quick to lower the interest rate on the savings account and fixed deposits. In the last few months, many banks have cut the interest rate on their fixed deposits, and the recent cut may signal further cut.
Digital payments have become popular. More and more people are using it on a regular basis. Unscrupulous people are always looking at ways to hack into your profile and wipe your bank account clean. As a result, banks are coming down with stringent payment mechanisms. RBI plans to put up a central payment fraud registry to track any possible payment-related fraud. The payment system participants such as banks,e-wallets, payment banks will be provided access so that they are able to do real time fraud monitoring. This aggregated data will also help to educate customers on the payment-related risks. Currently, banks report banking frauds to the Central Fraud Monitoring Cell of the Reserve Bank.
National Electronic Funds Transfer (NEFT) is one of the three popular payment systems. Immediate Mobile Payment Service (IMPS) and Real Time Gross Settlement (RTGS) are the other two payment systems. IMPS and RTGS are available on real time basis whereas, one could transfer money through NEFT only on the working days (except 2nd and 4th Saturdays of the month) within 8.00 am to 7.00 pm.
Now, NEFT will available for 24 hours, 7 days a week. This means that customers can transfer more than Rs.2 lakh on a non-working day as well. The upper limit of transaction through IMPS is Rs.2 lakh.
The RBI has cut the repo rate but it needs to be seen whether bank customers will be able to taste the fruit. Also we have to see whether it will be able to deliver the much needed impetus in the today’s slowing economy.
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