Thursday, April 19, 2012

RBI cuts Repo Rate by 50 basis points

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Impact of repo rate cut by RBI
A couple of days back, RBI announced reduction in repo rates by 0.5% or 50 basis points. This was higher than expected by analysts most of whom had predicted a reduction of 0.25% or 25 basis points. With growth slowing down, this is seen as a move by RBI to trigger the growth.

Repo or Repurchase rate is the rate at which the RBI lends shot-term money to the banks against securities. When the repo rate increases, borrowing from RBI becomes more expensive which makes the funding for banks expensive and in turn it makes funding for customer expensive. Similarly, when repo rate decreases, the lending rates comes down. With this though, the deposit rates also comes down so expect lower fixed deposit rates from banks now. It is good time to invest in fixed deposits now for long term. Home loan borrowers can wait few weeks for the lending rates to come down.

All the banks are expected to pass the benefit of lower repo rates to customers. The reduction in repo rates is good news for borrowers as their EMIs will come down. IDBI bank has already announced the reduced lending and deposit rates and other banks are expected to follow suit.

Along with this, RBI has also restricted banks to not charge any pre-payment penalty to borrowers for closing their loan account. Most banks charge 1 to 2% of the outstanding loan amount for prepayment.
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