Reserve Bank of India (RBI) rate cut

The Reserve Bank of India (RBI) is the centre of the Banking System. One of the major tasks of a Central banking body is making Monetary Policies and sustaining Economic Stability in the Country. One of the Monetary Policy tools that RBI manages is the Rate of Interest for Lending, also known as the Repo rate. This is the rate at which RBI lends money to the banks. Banks borrow money from RBI by selling their securities during a cash crunch and to maintain liquidity. This Lending rate is an important tool through which RBI controls Inflation, Money Supply &, therefore, is able to manage the Economic Condition of the Country.

The Repo rates have an impact on the Banking System and trickle down to the general consumers slowly. Higher Repo rates imply that banks have to pay higher interest to RBI for borrowing funds and vice versa. While the impact on banking is immediate, the effects of change in Repo rate being to show only after months of implementation. The effect on the stock market is also sudden as any change in Monetary Policy tools often drives Investor Sentiments.

RBI implements a rate cut when the Economy is showing slow Growth and Market Liquidity is low. RBI pumps Money in the Market by reducing the rate at which Banks Borrow Money thereby boosting borrowing. This, in turn, boosts borrowing by Businesses and Industries as they find it cheaper to borrow money for their Growths. When the RBI rate cut is implemented, banks have to bring down their own lending rates for retail customers. This brings a rise in loans taken by customers’ mostly home loans which are often high in value. Gradually the Money supply in the Market increases leading to Economic growth. On the contrary, when Money flow in the market and Inflation is high, RBI cuts the Repo rate to stabilise the economy. The Negative impact of RBI rate cut is seen when banks adjust the Interest rates on the Savings bank account and fixed deposits which lower the earnings on savings.

Leave a Comment

Your email address will not be published.