Good or Bad Impacts of RBI's Repo Rate Cut

Posted by Bhavna Singhal on November 13th, 2019

The Reserve Bank of India has recently lowered the repo rate from 5.40% to 5.15% owing to the slow economic growth in India. It is the fifth time in 2019 that the RBI has cut the interest rates to accelerate the economic growth in the economy. Also, the RBI governor, Shaktikanta Das, has added that the Reserve Bank of India will continue with this accommodative stance to revive the growth in the economy. Therefore, one can easily guess that the Current repo rate cuts have affected various sectors of the economy. While the impact on some of the sectors ensures profit, some arenas suffer loss.

Good Impact of RBI’s Repo Rate Cut

The recent lowering of the repo rate by 25 basis points has helped many to rejoice due to the benefits they can avail. Some of the good effects of the repo rate cut are mentioned below.

• When the repo rate is lowered, the commercial banks can easily borrow money from the RBI at a lower repo rate. This benefit is usually passed on to the customers by the commercial banks in the form of a lower rate of interest on home loans, car loans, and personal loans. This encourages the people to avail of loan and on the other hand, lower rates of interest on loans also help to lower the overall cost of the loan.

• Another added advantage associated with the repo rate cut is the facility of linking home loans with the repo rate. With the gradual decrease in the repo rate, it is seen that though RBI is reducing the repo rate, the benefit is not passed on to the customers by the financial organizations. So, to ensure that the customers can enjoy the benefit, the RBI has made it compulsory for every bank to link the customer’s home loan with the repo rate.

• Other than general borrowers, the repo rate cut also helps the industrial sector to grow. The rate cut helps the industries to avail loans from banks and other financial institutions at cheaper interest rates. This may result in reducing the price of the commodities, which ultimately affects the general people. The lower rate of interest also helps companies and industries to make investments and work on expanding the business.

Bad Impacts of RBI’s Repo Rate Cut

The repo rate cut may ensure happiness to certain sectors, but there are some may run into loss in the long run if the rate cut continues. Below are some of the bad effects of RBI’s repo rate cut.

• The recent cut in the repo rate has brought down the repo rate to a nine-year low, and it has gradually started to affect the returns fetched from fixed deposits. Many banking organizations have reduced the interest rates on the fixed deposits in India. However, the interest cut on the long term FDs has been less compared to the rate cuts on short term ones. 

• Owing to the lowering of the repo rate by RBI, the interest rates on many small savings schemes have been reduced by the government. 10 basis points have lowered interest rates. But, it should be noted that the government revises the interest rates on these savings schemes every quarter.

• There are chances that the interest rates on the fixed deposits in various banks in India will also reduce due to the repo rate cut. 

The Reserve Bank of India lowers and highers the repo rate in India due to various macroeconomic factors. It is because the repo rate is one of the most significant instruments used by the RBI to control the credit supply in the economy. And, other than the above mentioned good and bad effects posed on the economy due to the rate cut, the repo rate helps to control inflation in the nation. 

Read:- Difference between Repo Rate and MCLR