That the last rate cut was done almost two years ago sums up the extent of trouble that Indian economy had been in. Reeling under high inflation, high interest rates, high lending rates and snail paced growth of the economy the time finally arrived yesterday when the RBI relented and reduced the repo rate by 0.25% or 25 basis points.
Indeed, a Pongal/Sankranti gift by Raghuram Rajan, a move that is expected to propel the much awaited growth of the economy.
The repo rate, key policy rate at which the banks borrow to meet their short-term funding deficits, was reduced to 7.75% from 8% which no doubt is a huge boost for the sagging economy.
Lower than expected inflation levels, unprecedented fall in the crude prices, improved trade deficit, rise in the manufacturing sector output are all a few positives that has lead to this surprise announcement by the central bank much ahead of its February monetary policy.
Biggest beneficiaryThe biggest beneficiary of this rate cut obviously would be the home loan segment, the largest lending and borrowing segment for banks and financial institutions.
A few banks have promptly announced new lending rates which is as low as 10% with a promise of more such reductions in the coming months.
Considering the rates were in the range of 12% a year ago, the new rates would surely bring smiles to the borrowers’ faces.
Apart from being beneficial for new borrowers, it would be positive for existing borrowers as well whose EMIs would be reset in line with the rate cut.
More money to spendIt has to be also understood that with lower outflow of money by way of EMIs, people would have more money to spend which would boost consumption, leading to overall economy growth.
On a Rs.50 lakh loan for a period of 20 years, a reduction of interest rates by 0.25% would put an extra amount of Rs.831 per month in the pockets of a borrower.
Such savings across the scale of borrowers would lead to a huge saving capacity that can offer two benefits – higher savings leading to higher investments in assets and/or higher spending; both are good for the economy.
Future prospectsIf the inflation levels continue to offer the desired comfort to the RBI we can expect more such cuts in the near future which would help not only the home loan borrowers but also boost the real estate segment that hopes to bring new buyers.
With the haze that had shrouded the interest rates getting cleared, floating rate option of loans would continue to look attractive. It would be highly recommended not to choose the fixed rate until a few more rate cuts.
