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

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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.

 

Banks declare their MCLR each month but monthly changes in the MCLR is not accounted for in the case of home loans of an existing borrower. MCLR linked home loan interest rate is reset every 12 months ( 6 months for some banks) and hence for a borrower the MCLR of the bank after every 12 months from the date of the starting of the home loan matters.

 

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