Repo Rate Cuts

By admin August 10, 2019 12:41

Why in news?

RBI has cut the repo rate and reserve repo rate by 35 basis points (bps).Basis point (BPS) is a common unit of measure for interest rates and one basis point is equal to 0.01% This is fourth time in a row that the RBI has cut the repo rate starting from February, 2019.

RBI reduced the key policy rates by 25 bps each time in the three previous monetary policy reviews. Now,the key policy rate has been reduced by 110bps after adding fourth rate cut and currently, the repo rate stands at 5.40 per cent down from 5.75 per cent.

Repo rate:

It is the rate at which the central bank(RBI) of a country lends money to commercial banks in the event of any shortfall of funds.

Repo rate is used by monetary authorities to control inflation.

Relationship between Repo rate and Inflation:

Repo rate is used to control Inflation.For example:to reduce inflation, RBI increase the repo rate and this will increase the cost of borrowing and lending of the banks.As the rates are high the availability of credit and demand decreases resulting to decrease in inflation.

Benefits of repo rate cuts:

The Reserve Bank of India’s decision to cut rates by 35 basis point is a positive decision.

This move will allow banks to lend to priority sectors, including to housing sector of up to Rs 20 lakh loans.

Increase the credit flow especially to affordable housing sector.

Boost the demand for investment, no doubt.

The takers of home and car loans will get benefited.


Effects of repo rate cuts:

  • Pensioners and senior citizens will be at loss due to decrease in the interest rate.

  • Reduction in fixed income returns.

  • Recently, the State Bank of India (SBI) reduced interest rates on fixed deposits (FD) in line with the reduction in key rates.

  • The interest rate cut has been sharper for short-term tenures, i.e., up to 179 days by 50-75 bps. However, for longer tenures the bank cut rates by 20 bps.

  • The government also reduced the interest rates on small savings schemes by 10 bps for the July-September quarter.


How the latest rate cut can impact both new and existing borrowers.

Effects of Repo Rate Cuts on borrowers:

  • A fourth rate cut is good news for borrowers as EMIs (equated monthly installments) are likely to go down.

  • For existing borrowers whose loans linked to MCLR 
    this rate cut will see a reduction in EMI outgo only when bank lowers its MCLR.

  • With loans linked to base rate or BPLR  

        If your home loan is still linked to the base rate or BPLR, then one should consider switching to an MCLR-linked loan. This is because MCLR offers better transparency of policy rates.

  • For new borrowers

           As a new borrower, one have the option to choose to take your home loan linked with either MCLR or repo rate.

       What one needs to do?

  • If one is planning to park his/her money in fixed income instruments such as debt funds, then short-term and ultra-short term funds would be better option.For investors, the advice is to stick to shorter-term bonds.

  • For depositor, one may lock in at the current levels.

  • A new borrower should opt for floating rate loans.

  • If one is investing in debt fund, one can continue looking at ultra-short term and short term funds.


      Way forward:

  • Small tinkering of the repo rate should not make much of a big difference and the bigger picture should be kept in mind.

  • The cut is a good one if it is passed on by the banks and bank rates come down.

  • The RBI will now need to step in for accelerating transmission of the rate cut, for the consumers to feel the benefit of lower rates.


By admin August 10, 2019 12:41