In view of the growing crisis of Coronavirus, the Reserve Bank’s Monetary Policy Committee has announced a cut in policy rates with the aim of increasing the availability of capital and reducing interest rates. The Reserve Bank Governor said that the policy repo rate has been cut by 0.40 percent, while the reverse repo rate has also been reduced by 40 basis points to 3.35%.
RBI Governor Shaktikanta Das said that the six-member Monetary Policy Committee voted in favor of a 0.40 percent reduction in the interest rate by 5: 1. A special meeting of the committee was called because of the growing crisis of the coronavirus. Giving information about the decision taken on the basis of majority in it, Reserve Bank Governor Shaktikanta Das said on Friday that the committee has reviewed the situation in the country and the world due to the coronavirus.
Repo rate has been cut by 40 basis points to help accelerate the Indian economy badly hit by the Coronavirus. Now the repo rate is 4 percent. This is the second time in lockdown when the RBI has cut the repo rate. Earlier on March 27, the repo rate was cut by 0.75 percent.
What is Repo Rate
Repo is the rate at which the Reserve Bank gives loans to other banks. Banks borrow from the Reserve Bank when the demand for loans increases. For this, they have to pay fixed interest. A cut in the repo rate means that banks will get loans at a lower rate than the Reserve Bank.
Advantage of reduction in repo rate
When the RBI cuts the repo rate, financial pressure on other banks is lessened. After the repo rate cut by RBI, the rest of the banks cut their interest rates. Due to this, the EMI of your home loan and car loan decreases. When the repo rate is low, inflation is controlled. Due to this, the country’s economy also benefits on a large scale. The auto and home loan sector benefits. Due to low repo rate, the loan is cheaper and it helps in home loans.
Such companies that have a lot of debt also benefit because they have to pay less interest than before after the repo rate is reduced. This decision of RBI promotes investment in private sector. Currently, attracting investment is the biggest challenge in the country. Investment in infrastructure increases and the government gets a boost to help the sector. If the repo rate is low then the debt is cheaper and after these companies get more ease in raising capital.
What is reverse repo rate?
After the day’s work, the banks keep the amount left with the Reserve Bank of India. The Reserve Bank pays interest on this amount. The rate at which the Reserve Bank of India pays interest to banks on this amount is called reverse repo rate.
What is the benefit of reverse repo rate reduction?
The reduction in reverse repo rate means that banks will get less interest on depositing their excess money with the Reserve Bank. Banks will be less willing to hold their cash with the Reserve Bank immediately. This will increase the availability of cash with them. Banks will be encouraged to lend more to the productive sectors of the economy. Banks will insist on earning more interest by distributing loans instead of depositing their surplus money with the Reserve Bank. Banks can cut interest rates on loans.
There may be a cut in the interest rates on FD.
The steps announced by RBI to increase liquidity in the system will put pressure on banks to reduce interest rates on deposits. According to experts, banks can once again cut interest rates on deposits and FDs. Banks have already cut interest rates on deposits significantly.