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RBI slashes repo rate by 25 bps to improve prospects for borrowers

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  • Feb 18, 2019
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What’s The Affair?
 
Post its bi-monthly monetary policy on the 7th February, the Reserve Bank of India brought some happy news for borrowers in the form of key policy rates, that have been slashed by 25 bps (basis points). Following the announcement, the repo rates now stand at 6.25 percent while the reserve repo rate at 6.00 percent. 
 
(One basis point is equivalent to one hundredth portion of percentage. And the term “repo rate” suggests the rate at which commercial banks borrow money from RBI.)  
 
Besides the above, Monetary Policy Committee (MPC) seems to have altered its stance to neutral. MPC had previously changed its stance to ‘calibrated tightening’ in the meeting of October 2018, which it maintained in the meeting of December 2018 as well. 
 
Looking Back
 
Before this, the last time that RBI had cut down rates was in August 2017, after which it kept the rates unaffected for the last two monetary policy announcements in October and December 2018, respectively. The rates had however been raised two times in June and August 2018, increased both times by 25 bps.  
 
What Will Its Impact Be?
 
In tandem with the apex bank dropping the repo rate, it is possible that other banks will mimic the same and reduce their marginal cost of funds based on lending rates or MCLR, which basically refers to minimum interest rate that a bank charges on loan. 
 
Reflecting on the recent change, several business heads were of the view that the 25 bps cut in repo rates is a pleasant surprise, as the transmission of the rate cut is expected to reduce the borrowing cost of retail borrowers, corporates and MSMEs thus enabling both private consumption and private apex. This could further help in achieving the objective of the interim budget, which is of stimulating consumption in addition to housing demand. 
 
The reduction in Repo and Reverse Repo rates by the Reserve Bank of India will boost the demands in the real estate sector. It is anticipated that consequently banks will pass on the revised rate benefits to those who avail loans, thus making it pretty convenient for them to make the purchase decision.  
 
The reduction in interest rates for home loans by banks will help strengthen the sentiments of the homebuyers in the country. This could also lead to a marginal drop in their EMIs too. The current scenario in real estate has had several home buyers as fence sitters, but this rate cut might just prove to be the boost they needed, to make their decisions regarding property purchase
 
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