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Impact of Interest rate cut UPSC NOTE

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  If the RBI cuts the repo rate, floating-rate loans from banks will become cheaper . Borrowers have two options: Keep EMI Same: Maintain t...

 

  • 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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Learnerz IAS | Concept oriented UPSC Classes in Malayalam: Impact of Interest rate cut UPSC NOTE
Impact of Interest rate cut UPSC NOTE
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