In what can be safely termed as one of the most unexpected move by Raghuram Rajan ever, the RBI – Reserve Bank of India lowered the policy rates on Wednesday for a second time this year. It is being considered by many as a bid to revive economic growth as the inflation continues to fall on a consistent basis. Although the markets had expected further rates cut by RBI in January but what came as a surprise is the timing of the announcement i.e. just a few days after the Union Budget was tabled. The Cash Reserve Ratio (CRR) has been left untouched though.
The RBI has cut its repo rate by 25 basis points. The repo rate now stands at 7.5% and as a result the Indian bond prices are touching the sky and are at an all time high. RBI expects the cut in rate to aid in credit off-take and production. Both the rate cuts have taken place out of RBIs scheduled policy review meetings. Because of the cuts, the picture of a fast and steadfastly improving Indian economy seems right on track.
The benefits of the rate cuts have not been passed on to the borrowers till now as commercial banks have shown hesitation in reducing their lending rates. Also RBIs unexpected move also proves that it is more than satisfied with the fiscal consolidation and immense faith it has in Narendra Modi led NDA to sustain fiscal discipline. This unprecedented move by RBI has been welcomed with open arms by industry experts and trade pundits alike.
Here are a few ways in which the rate cut effects the common man and the Indian corporate world.
EMIs to come down: A reduction of 25 basis points will aid in decreasing the EMIs significantly. For instance, for a home loan of Rs 50 Lakhs spread over a tenure of 20 years, EMIs will come down by as much as Rs 842.
Banks to gain: Commercial banks will benefit as the value of their bond portfolio shoots up. Companies will emerge stronger as the interest rates fall.
Improved market sentiments: The immense ripple effects of the unexpected rate cuts will lead to improved market sentiments. The effect of the same can already be seen as the Sensex index breached the all important 30000 mark for the first time in history while Nifty touched an all time high of 9100 during early trades made in the day.
Firms can raise equity: The rate cut has improved the already positive sentiments prevailing in the market even further. As a result companies can opt to raise equity at this juncture.
Economy growth to gain momentum: Easy availability of loans will lead to higher spending in the economy, thus the consumers as well as the corporates gain massively. The economy will gain momentum as a result when this happens.
Companies will benefit too: Loans to corporates are all set to become cheaper as well. The disbursements of the same are likely to up, allowing corporates to get easy access to comparatively cheaper credit.