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RBI Rate cut: How it affects you?

The Reserve Bank of India (RBI) will be announcing the monetary policy review on March 19th, Tuesday. It is widely expected that the central bank may cut the repo rate by 25 basis points as core inflation dropped below 4% in February. However, RBI has its own concerns about lowering the repo rates.

Every time the RBI cuts CRR or repo rates, there is a buzz in the system that lending rates and deposit rates will come down. In other words, these key rates, which are managed by the RBI have a direct impact on borrowers as well as depositors.

This is how these measures impact you.

What is Cash Reserve Ratio (CRR)?

Cash reserve ratio is a portion of deposits every bank has to keep with the RBI. This is a stipulation as per the section 42 (1) of the RBI Act 1934.

CRR cut and its impact

A cut in CRR infuses liquidity in the system. The last CRR cut injected around Rs 18,000 crore (Rs 180 billion) in the banking system. As a result, the bank has more money to lend out as against every rupee deposit they accept. The objective of CRR cut is to lower the interest rates. However, the downside is a CRR cut may trigger inflation. The current CRR is pegged at 4%.


What is Repo Rate?

Repo rate is the rate at which the RBI lends money to commercial banks. It is an overnight rate of interest that a bank pays for borrowing from the RBI.

Repo rate cut and its impact

A repo rate cut means the banks will be able to borrow at lower rates from RBI. As a result, the benefit of rate cut is likely to be passed on to the borrower. If the repo rate cut is coupled with CRR cut, it means the banks will have more money and cheaper money at their disposal.

This dual action of RBI is definitely a positive for borrowers as it is a strong signal for interest rates to come down further. So they can benefit from lower EMIs. However, it is not the best news for investors, as they have to brace lower rates on deposits.

What can depositors do to mitigate the impact of rate cuts? 

Read the blog tomorrow for further details…