If the RBI cuts the repo rate, floating-rate loans from banks will become cheaper. Borrowers have two options:
Keep EMI Same: Maintain the same monthly payment while reducing the loan tenure, which minimizes total interest paid.
Reduce EMI Amount: Lower the monthly payment while keeping the loan tenure the same, which can result in paying more interest over time.
Low floating rates make new loans attractive, but borrowers should be cautious as interest rates can rise again over the long term.
When the RBI lowers rates, deposit rates will likely decrease as well.
The extent of this reduction will depend on banks' decisions but will generally align with the repo rate cut.
Other financial products (e.g., Small Savings, government bonds) will also see interest rate movements in a similar direction, suggesting it might be beneficial to lock in current rates.
In the case of mutual funds, particularly debt funds, lower interest rates can lead to higher returns as bond prices increase.
Market movements may anticipate these rate changes before they occur.
Lower interest rates help borrowers but negatively impact savers.
However, the RBI typically reduces rates when inflation is low, helping maintain real returns for savers.
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