Rita examines, for Different Truths, how the RBI’s slashing of the repo rate by 25 bps results in cheaper EMIs, boosted growth, happier stock markets – but lower FD returns for savers.
The Reserve Bank of India’s (RBI) decision to cut the repo rate by 25 basis points (0.25%) is generally viewed as a pro-growth measure aimed at injecting liquidity and stimulating economic activity.
Here is an overview of the key impacts:
1. Direct Impact on Consumers
Reduction in Loan EMIs (Equated Monthly Installments): Since most new loans are linked to the Repo Rate (External Benchmark Lending Rate – EBLR), banks are expected to reduce their lending rates.
Benefit: EMIs for home loans, car loans, and personal loans are likely to decrease, providing immediate relief to borrowers and increasing theirdisposable income.
Lower Returns on Fixed Deposits (FDs): Due to the increased liquidity in the banking system and falling loan rates, banks may lower the interest rates offered on term deposits.
Concern: This affects savers, particularly senior citizens, who depend heavily on FD interest for their income.
2. Impact on Economic Growth & Business
Boost to Consumption: Cheaper credit (loans) encourages consumers to purchase high-value items like homes and cars, driving up demand and contributing to GDP growth.
Increase in Investment: For corporate firms, the cost of borrowing for new projects or business expansion becomes lower. This spurs capital investment and job creation in the economy.
Positive Sentiment in the Stock Market: Lower interest rates typically boost corporate profitability by reducing debt servicing costs. Consequently, the stock market often reacts positively, particularly in sectors like real estate, banking, and infrastructure.
3. Impact on Monetary Policy
Inflation Management: The RBI’s decision to cut the rate is facilitated by the fact that the inflation rate is currently within its acceptable target range.
Enhanced Liquidity: By making it cheaper for commercial banks to borrow from the RBI, the cut increases the flow of money (liquidity) in the market, which is essential for economic momentum.
In essence, the 0.25% repo rate cut is a strategic move by the RBI to make credit affordable, boost market sentiment, and propel the overall economic growth trajectory.
Picture design by Anumita Roy
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