The Reserve Bank of India (RBI) Yesterday slashed the Repo rate by 25 Basis points(0.25%) raising hopes of cheaper home loans and EMI,s while CRR (Cash Reserve ratio) is Unchanged.
After the announcement of policy rate, officials of the central bank said that the real neutral interest rate is 1.25 %, first of all we will try to know what is the Neutral Real interest .
Simply the neutral Real interest is estimated level of interest rate at which the economy is growing under the controlled inflation, and it also gives the indication about monetary policy at any point of time whether it is too tight or loose. It is a famous variable to judge whether monetary policy is on the right track or not.
Now back to the decision on the Repo Rate –the rate at which banks borrow money from the central bank. The Repo Rate has been reduced to 6.25% from 6.50% by newly constituted MPC (Monetary Policy Committee) headed by the newly elected RBI Governor (DR. Urijit Patel).
The major impact on the masses by the reduction in policy or repo rate signifies that the bank will get cheaper funds from the central Bank, so that the cost of Borrowing will come down (similarly cost of production to any Manufacturer) , as well as the bank will reduce the Base rate which leads to lower lending rate, it means people and business firms will borrow more money due to slackness in the lower interest rates.
Everyone wants to grow their money, keeping the money in the bank is attractive for the consumers, when interest rate is high. If there is lower interest then people will not park their money in the banks. Therefore consumers start to look towards investments with higher returns. So here stock markets and Business firms come in step . People start investing into shares. So that Business firms and corporate have more money and they are also comfortable in the borrowing from the Banks. So they start investing money in the new projects, which helps in job creation as well as strengthen in economy.
Controlling Money Supply through increase or decrease in Repo rate:
In case of high inflation, RBI will increase the repo rate to absorb the money supply from the market. But in the case of low inflation, RBI Lower the interest rate to increase in money supply.
Conclusion: Now the RBI decreases the repo rate the interest rate which banks have to pay RBI reduces. They in turn provide to the benefit to the consumers to lowering the interest rates. It will creates very good borrowing environment, particularly for Retail customers and higher demand for mortgage’s and personal loans. This is good time to buy home, car etc.