RBI Rate cut and its impact on economy

Repo rate made easy for students to understand. RBI cuts repo rate by 50 points. Lets look at what is repo rate, its impact on students and economy.

The Rate Cut news
The Reserve Bank of India (RBI) lowered the benchmark repo rate by 50 basis points to 6.75 percent, while keeping CRR and SLR unchanged at 4 percent and 21.5 percent, respectively. This marks the fourth repo rate cut by the RBI since January 2015. However, it has lowered its FY16 GDP growth target to 7.4 percent from 7.6 percent. It also said the focus should now shift to bringing inflation down to 5 percent by FY17-end.

What is Repo and Reverse Repo rate
Repo rate, also called repurchase rate, is the rate of interest that banks pay when they borrow money from the Reserve Bank of India to meet their short-term fund requirements. This is called repurchase rate because when they borrow money from the RBI, they keep government securities with the central bank as collateral. When they pay the money back to RBI, they take the collateral back. Reverse repo rate is the rate of interest that banks get when they keep their surplus money with the RBI.

Let us take a look at some of the likely impacts of this rate cut

1. EMIs to come down
Get ready for reduced loans and their EMI for your college fees and other loans which your family might has taken.

2. Improved market sentiment
The ripple effect of this rate cut will be seen in the form of improved stock market sentiment with Sensex and nifty gaining momentum.

3. Banks to gain
Banks will gain as the value of their bond portfolio rises; companies will get stronger as interest costs fall.

4. Corporates to benefit too
Corporate loans, too, are set to get cheaper and hence the expected disbursement of those will increase.

5. Companies can raise equity
Improved market sentiment will enable companies to raise equity, enhance prospects for government divestment.

6. Economy growth to get momentum
With more consumer spending and easy availability of loans -corporate as well as consumer- the economy growth is likely to pick up pace. Good news before diwali.

Policy highlights

  • Repo rate cut by 50 bps to 6.75%, lowest in 4 years
  • Reserve repo rate cut to 5.75%
    CRR unchanged at 4%
  • Growth estimate for 2015-16 marginally cut to 7.4% from 7.6%
  • Tentative economic recovery underway, far from robust
    Global environment looking weak; not good for India
  • Growth likely to pick up in later part of this fiscal
  • CPI inflation expected to reach 5.8% in January 2016
  • Inflation is likely to go up from Sept
    FPI investment limit in debt securities to be fixed in rupee term
  • FPI investment limit in govt bonds to be hiked to 5% by 2018
  • RBI to issue final guidelines on base rate computation by November-end.