Podcast | Here’s How RBI’s Repo Rate Cut Affects You

Tune in to The Big Story to understand how the RBI’s repo rate cut impacts you and the market.

The RBI cut the bench mark interest rate by 0.25 percent for the second time in a row, on Thursday, 4 April, to bring interest rate to 6 percent.

If you are the kind who is wondering, ‘Err, okay, so what is it to me?’ This edition of The Big Story podcast is for you. Tune in to The Big Story to understand how this cut impacts you and the market shares.

So, this current rate of 6 percent is the key interest rate at which the RBI lends short duration funds to commercial banks.

Now, what the RBI is doing is signalling the banks that the interest rates are going to fall and with the lowered rate, the commercial banks will have more room to pass on the benefit to loan borrowers. But hold on, that doesn't necessarily mean that banks will cut their interest rates also by 25 basis points. That figure depends upon the banks and their cost of raising money, which in turn has to do with the deposit rate.

Deposit rate is the money that banks have to pay their depositors for keeping their money in the bank — it's the same money remember that they use in lending. And of course banks are like any other business so they have their fixed costs all to take care of. So, maybe it'll be reduced by a few basis points at best — all depending on their cost of fund.

But people were expecting a higher cut of .5 people because inflation has been quite low and also because the economic growth had slowed down and needed a boost.

As far as your home or car loan are concerned they are LIKELY to fall. And in that sense, good news for you and me.

So, if you're wondering what all led to the decision of 0.25 percent instead 0.5 percent, which is what was expected, two things determined it:

Expectations of a below average monsoon – you know, El Nino keeps messing up with our monsoons and if it's below average, food prices are going to shoot up.

Fiscal slippage – with the elections around the corner, most parties made promises for heavy spending on welfare schemes. That can have adverse impact on fiscal health of the country.

So after this decision the RBI has projected GDP growth for 2019-20 at 7.2 percent, and downward retail inflation estimate to 2.9-3 percent in first half of FY20. But with this, how is share market going to behave henceforth?