Reserve Bank of India cuts Repo rates by 0.35 percent 08/08/2019 – Posted in: Daily News – Tags: Marginal Cost of Funds based Lending Rate, Repo Rate, Reserve Repo Rate
RESERVE BANK OF INDIA CUTS REPO RATES
For: Mains
Topics covered: New Repo rates – its impacts and significances, Reserve Repo rate, Monetary Policy Committee, MCLR
News Flash
In third bi-monthly Monetary Policy Statement for 2019-20, the Monetary Policy Committee (MPC) of the Reserve Bank of India, cut the repo rate by 0.35 percent.
- The decision was taken to boost the economy.
- The repo rate now stands at 5.40 percent.
- Marginal standing facility rate and the Bank Rate stands at 5.65 percent.
- The reverse repo rate was reduced to 5.15 percent.
Repo rate
- Repo rate is the interest rate at which the Reserve Bank of India (Central Bank) lends money to commercial banks, in case of any shortfall of funds.
- When the cost of borrowing goes down for banks, they are able to lower their marginal cost of funds based lending rate (MCLR), which directly impacts loans.
Impact
- Small savings interest rates fall and thereby banks reduce their fixed deposit interest rates.
- The pressure on the banks to reduce their lending rates by a sizeable margin will remain.
- The real GDP growth for 2019-20 is revised downwards from 7 percent in the June policy to 6.9 percent.
- This rate cut will have a direct impact on the real estate sector.
Significance
- When the RBI cuts the repo rate, there is money available with banks at a lesser cost and this, in turn, helps keep the lending rates low.
- Lending rate cuts are key to recovery.
- RBI cut rates to boost economic growth.
Why has this step taken?
- The step is taken due to the slowdown in the economy.
- There is a constant fall in auto sales, slowing investments and subdued exports.
MCLR (Marginal Cost of Funds based Lending Rate)
- A measure of a bank’s cost of fund is MCLR.
- A repo rate cut by RBI will mean MCLR of bank falling which in turn leads to low home loan interest rate and vice versa.
- Since April 2016, all loans sanctioned by banks including car loans and home loans are linked to the bank’s MCLR.
- A cut in bank’s MCLR benefits all car loans and home loan borrowers.
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Way ahead
- With the cost of funds coming down for the banks, the lending rate of interest is expected to fall further.
- This will stand to benefit both existing and new borrowers as their EMI will be lower and interest burden will also come down.
Source: Financial Express
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