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How does the change in RBI’s repo rate impact your finances?

The MPC has reduced the repo rate to 5.75%. Let us find out its impacts.

On 6th June 2019, the Monetary Policy Committee (MPC) reduced the repo rate from 6% to 5.75%. This is great news for loan takers. A low repo rate signals a lower interest rate on their loans. However, the reduction in the interest rate is up to the discretion of the respective banks. 

Repo rate change, interest on savings account

What is the repo rate?

A repo rate is the rate at which Reserve Bank of India (RBI) lends to commercial banks. The borrowing is mainly in the form of government securities. When you take a loan from the bank, an interest is charged on the principal. Similarly, banks too can borrow money from RBI during a cash crunch on which they must pay interest to the Central Bank. This interest rate is called as the repo rate.

Repo Rate and Bank Loan Rates

The recent cut in the repo rate, which makes it the second consecutive rate cut by the RBI, has increased the probability of getting loans at lower interest rate. This is likely to reduce the EMI on your home loans, car loans etc. Analysts believe that it’s just a matter of time and banks will have to reduce the interest rates on the loans. People looking to take fresh loans should wait for a couple of weeks and let the picture get clearer in the light of repo rate cut. On the other hand, existing loan borrowers will have to wait longer before they see significant interest rate cuts in their loan accounts.

Repo rate and Savings Account Interest Rate

With the reduction of the repo rate, savings account interest rates will be lower. But, the private banks offer a higher savings rate than the public sector Banks. This rate ranges from 5% – 7 % on savings account deposits. Recently, State Bank of India has linked its deposits on savings account of over Rs 1 lakh to the repo rate.

Take for example, SBI, which offers an interest rate of 5.75% – 6%. Kotak Bank offers a savings rate of up to 6%. The Fixed Deposit rate of Kotak is 7.10%. Thus, it would be beneficial for you to look at private Banks rather than public sector banks because they will provide better interest rates.

Banks have cut the interest rate on all types of fixed deposits (be it long term or short term) after the last repo cut by the RBI.

Repo Rate and Investment in the Capital Markets

When the RBI cuts the repo rate, it does not have a direct impact on the stock market itself. The direct effect is that it becomes less expensive for banks to borrow money from the central bank. Since it costs them less to borrow money, financial institutions often choose to reduce or maintain the same rates of interest they charge their customers. The cut in the repo rate brings good news forbond holders. The drop in the repo rate means that the bond price will rise.. In a scenario like this, with a cut of the repo rate, it is advisable to invest in the stock market through an equity mutual fund as equity markets has the potential to deliver higher returns.  

Conclusion

Thus, we have seen the implications of repo rate cut on the Indian economy. The Repo rate cut is beneficial for customers who have long tenure loans and want to move to loans with lower rates of interest. Rate Cuts have far reaching positive impacts on every sector of the economy. This tool is often used in a timely manner by the RBI to handle the changing aspects of the Indian Economy so that the benefits can be enjoyed by everyone.


Related Articles:

Savings Account interest rates

Fixed Deposit interest rates

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