RBI cut REPO Rate by 40bps - Its Meaning and Effect on our EMIs

Meaning of REPO Rate:

• Repo rate is the rate at which the Central Bank (RBI in case of India), lends money to the commercial banks in the case of fund shortfall.

• In the event of inflation, RBI increases the Repo Rate as a result of which Commercial Banks find it difficuilt to borrow fund from RBI, which further results in shortfall of fund with the Banks and ultimately to the public.

• Increased Repo rate arrests the flow of fund from banks to public and from public to market and this is how Inflation is encountered. 

BRIEF ABOUT RATE CUT BY 40 BPS

• Mr. Shaktikanta, the Governer of RBI, on 22th May 2020, has announced reduction in the repo rate under the liquidity adjustment facility by 40 bps to 4.0 per cent from 4.40 per cent earlier, with immediate effect. This means, RBI wants Commercial Banks to provide fund to public at reduced rate. 

• On 27 March 2020, the Reserve Bank of India (RBI) reduced the repo rate by 75 basis points (bps). The reduction saw the repo rate reduce from 5.15% to 4.40%

•  The Reserve Bank of India (RBI) has announced reduction in the repo rate under the liquidity adjustment facility (LAF) by 40 bps to 4.0 per cent from 4.40 per cent earlier, with immediate effect. Accordingly, the marginal standing facility (MSF) rate and the Bank Rate stand reduced to 4.25 per cent from 4.65 per cent; and the reverse repo rate under the LAF stands reduced to 3.35 per cent from 3.75 per cent.

EFFECT OF RATE CUT

• Good news for the home loan and car loan borrowers.It has been also decided to continue with the accommodative stance as long as it is necessary to revive growth and mitigate the impact of COVID-19 on the economy.

• Personal loans, car loans, home loans, etc. are expected to get cheaper due to the recent reduction in the repo rate. However, this will come into effect only if banks decide to pass on the benefit to their customers which indeed is done by the banks.

• Apart from benefitting general borrowers, this also is a huge boost to the industrial sector as they get loan at low rate of interest.

• The EMIs also get reduced for the loan taken due to which your outflow of fund will be reduced. Hence direct benefit is transfered to the Borrower. 

Tabular description of reduced EMIs

Moratorium of EMIs

• RBI has also announced the extension of moratorium of EMIs for further 3 months taking it to 31st August 2020. The earlier moratorium for 3 months was upto 31st May.

• It's not waiver of EMIs, your EMIs for this period will not be charged during this period but it will be either added to the Principal (loan) or your number of EMIs (loan period) will be added to the total.

• It's just a deferment of payment of this period to next period to enable borrowers to tide over the disruption made by covid-19

Happy reading!! 

                                   any comments, suggestions and remarks are welcome.      - CA Mukesh Yadav