Does a repo rate cut affect your investment

The Reserve Bank of India, on the advice of the MPC (Monetary Policy Committee), has recently lowered the repo rate from 5.40% to 5.15%. It is the fifth time in 2019 that the RBI has lowered the repo rate. The reduction in the repo rate by 75 basis points all through the year has brought down the repo rates to a nine-year low. This lowering of the repo rate affects the different sectors of the economy in many ways, along with the investments. But, before one starts with the consequences, it is important that he understands what repo rate is.

What is the repo rate?

Repo rate is the rate at which the Reserve Bank of India lends short term loans to the commercial banks when they run out of funds. The banks provide RBI-recognised securities that are above the Statutory Liquidity Ratio in order to avail the loan. The banks availing the loan have to repurchase these securities at a given date from the RBI in the interest rate known as repo rate. It is one of the significant financial tools used by RBI to control inflation.

How Can Repo Rate Cut Affect Your Investments?

Owing to the slow economic growth in India, the recent changes in the repo rate have been initiated by the RBI. The recent repo rate cut by 25 basis points will impact your investments, too. Some of the ways in which this rate cut may affect your investments are:

Fixed Deposits

When RBI reduces the repo rate, it can be seen that the interest rates on the fixed deposits are also reduced. The lowering of the interest rates eventually leads to a lower amount at the time of maturity. The interest rate cut on the FDs with short tenures are comparatively more than the cut on the FDs with longer tenures. However, the decrease in the interest rates on the fixed deposits will not be in proportion to the fall in the repo rate. The reason is lowering the interest rates too much will discourage the customers from saving in FDs, which will eventually result in a financial crunch in the banks. 

Mutual Funds

The lowering of the repo rate creates a positive impact on mutual funds investors. When the repo rate falls, the bond prices increase. Therefore, it becomes easier for the investors to avail a loan, which in turn leads to higher stock prices. And, as the stock price increases, the chances to have higher returns also increases.

Savings Accounts

It is generally expected that the interest rates on savings accounts will go down after the repo rate cut. Many of the nationalized banks in India have already reduced interest rates on savings accounts above Rs. 1 lakh. However, the interest rates on the savings deposits below Rs. 1 lakh is likely to remain unchanged. Also, the interest rates on small savings scheme may go down due to the rate cut.

The revision in the repo rate is made by the RBI due to various macroeconomic factors. These changes in the repo rates affect every arena of the economy. Apart from the ones listed above, the revision in the repo rate also affects the big-ticket loans like home loans and car loans. It happens when the commercial banks revise their MCLR, below which they cannot lend money to the customers.

READ:- Difference between Repo Rate and MCLR

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