The Reserve Bank of India today unexpectedly reduced repo rates to by 25 basis points. Is this the right move at the right time?
For the consumer, specifically the borrower, it is a great move make home loan and auto loan may become cheaper. The repo rate is the rate at which RBI lends money to banks.
Home loan and auto loans are typically priced at a floating rate, which means whenever the repo rate is reduced by RBI, banks will gradually pass on the lower rate to borrowers. Also, the reverse will happen when repo rates go up.
However, given the series of events that have led to this rate cut and the fact that elections are around the corner, the rate cut becomes questionable.
The first event- the last governor of the central bank, an autonomous institution, resigned because of very public differences with the government on policy matters. The new governor is perceived to be in sync finance ministry’s views on all the contentious issues. Second – the interim budget introduced measures which give more money in the hands of the people thereby increasing consumption demand, at the cost of a wider fiscal deficit and larger borrowing.
Lowering of borrowing rates at this juncture will boost lending and fuel growth, atleast in the current period i.e just before the elections.
Only the timing of the rate cut makes the move suspect. One will have to wait and see whether rate cuts are passed on and converted into growth or not?
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