RBI announces rate cut; Loans set to become cheaper

The new year has begun on a positive note for those planning to take on new loan and also for those borrowers who are already paying EMI against their home loan or a car loan. The RBI just announced a repo rate cut by quarter per cent (0.25 per cent) and this is likely to result in loans becoming marginally cheaper. The reduction in repo rate will make borrowing from RBI cheaper for banks and the banks are expected to pass this benefit on to their customers. At present, interest rates across banks average around 10.50 per cent for home loans, 11.25 per cent for car loans, and over 18.50 per cent for personal loans. National Housing Bank, IDBI Bank and RBS have already announced rate cuts following RBI’s announcement.

The RBI in its notification, stated that the change in its monetary policy is intended to support growth by providing an appropriate interest rate environment; further, it intended to curb inflation and ensure sufficient flow of funds to the productive sectors of economy.

In its third quarter review, RBI announced the following policy measures:

  • Reduction in repo rate by 25 basis points i.e., from 8.0 per cent to 7.75 per cent with immediate effect
  • Reverse repo rate adjusted to 6.75 per cent with immediate effect
  • Bank rate adjusted to 8.75 per cent
  • Reducing Cash Reserve Ratio (CRR) to 4.0 per cent effective fortnight beginning February 9, 2013

The industry experts opine that , this rate cut combined with reduction in CRR will help the investment and spur economic growth. The cash-strapped real estate developers feel that the decrease in interest rate will boost the sagging real estate market.

While the pundits welcome this news with optimism, the common man may not share that enthusiasm. A 0.25 per cent reduction in interest rate will only result in reducing the EMI by Rs. 63 on a Rs. 5 lakh car loan on a 5-year tenure. The highly inflated property rates needs to be slashed to make housing more affordable. Also, high price of essential commodities combined with ever rising fuel price has already dented common man’s wallet. Unless there is real downward trend in stubbornly high inflation and correction in real estate boom, any fiscal policy changes from RBI will do little to excite the aam aadmi.

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