Who Benefits when the Reserve Bank of India cuts Rates?

415

If consumers could have their way, they would prefer to get bank loans without necessarily paying any interest at all. But since it is near impossible finding a bank willing to lend people money without charging an interest, consumers have devised a new way of tipping the scale in their favor, which is to search for a lender (banks) that offers loans at a much lower interest rate. The idea is to reduce, as much as possible, the total amount refundable, so that you can easily pay off the debt and completely settle your creditors on time without needing to worry about your account going into defaults or lenders chasing after you with bailiffs like the Moorcroft debt recovery when you’re unable to make payments.

But do you know why it is sometimes challenging, if not impossible, to find a bank willing to lend you money at a low-interest rate? Well, the reason is none other than “Repo Rates.”

Over the last few years, there’s been a great buzz about whether or not the RBI needs to hack down the repo rate. You watch it on TV, you read about it in blogs online, but do you actually know who gets to enjoy the benefit whenever the RBI does cut the rates? YOU! In 2019 alone, the RBI brought down the repo rate on multiple occasions. First, on 6 June 2019, the repo rate was hacked down from 6.00% to 5.75%, by 25 basis points (bps). Later on, in August, the rate was further reduced by 35 basis, and finally, on 4 October 2019, RBI reduced it further by another 25 bps.

Although you might not really understand how these repo figures affect you, as a financial package consumer, at first glance, the fact remains that the drop in rates does have a direct consequence on you, the customer, who takes loans from banks. But what exactly is the extent of this effect? Read on to find out how this repo rate reduction affects your bank loan applications.

Repo rate, the bank, and YOU (the customer)

By definition, the repo rate is the rate at which RBI lends money to commercial banks in the country. Now, every time the RBI cuts down this rate, it means that commercial banks can borrow from them at a much lower interest rate.

Consequently, these other banks pass on the benefits to YOU, the final consumer, by reducing the interest rates on the loans they offer you. Therefore, every time you read it in the news that there is a cut in the repo rate, your heart should leap for joy because there usually is a consequent decline in the interest rates on loans offered by various banks.

But in reality, how does this affect you? Well, the answer to that isn’t farfetched. Reduced interest rates imply a reduced amount of interest, which ultimately ensures a reduced overall cost of loans.

Effect of repo reduction on consumers

Upon the recent reduction in the repo rates, consumers can expect to enjoy cheaper loan offers in terms of car loans, personal loans, home loans, student loans, business loans, and several other loan packages.

However, it is important to note that this benefit will only be passed on to you if your lender (the commercial bank you’re approaching) decides to pass it on to you, as they’re not obliged by law to do so. But that is not to say that you cannot still enjoy the benefits of a reduced repo rate, only that you may have to do a little digging to find banks willing to pass on the benefits to you.

How the repo rate cuts impact the industrial sectors

Apart from benefitting the general consumers, repo rate cuts also provide a huge boost to the country’s industrial sectors too. The reduction in the repo rate means that industries are able to access loans from lenders at a much cheaper rate, and this is likely to result in products and services becoming cheaper due to lower interest costs, ultimately benefitting you, the final consumer, in the end again.

 

That said, it remains to be seen how soon banks will implement rate cuts on the loans they offer.

comments