How Reduction In Repo Rate & CRR Affects Customers

Finally the wait is over as RBI on Tuesday 29th July 2013 announced slashing of repo rate by 25 basis points (bps) and cash reserve ratio (CRR) by 25 bps which industry experts believe will fuel the economic growth to some extent. Although experts were expecting higher rate cut this year. This lowering of the rate cuts has taken place for the first time in nine months.

Now let’s see how reducing the repo rate (defined in economic term as the rate at which RBI lends money to the banks) relates to the following individuals and sectors:

Banking: Lowering of repo rate directly reduces borrowing costs of a bank. Banks in turn reduces interest rates on different types of loans such as home, auto, business etc. Similarly trimming down of CRR allows banks to unlock money for lending to the customers i.e. with 0.25 rate cut banks are estimated to lend more than INR. 17 Crores.

Consumers: Lower repo rate does not necessarily benefit existing loan borrowers but new loan seekers can benefit from it immensely. For existing bank customers who have opted for floating rates for their home loans have to wait for longer period as banks normally takes time to trim down their EMI’s. This applies to other types of loans as well, i.e. auto and consumer goods loan, since there is a fixed interest rate on such types.
But one thing existing loan borrowers can do is switching to another bank which offers lower interest rate. Important to note is consumer cannot be penalized by the existing bank because RBI has mandated banks on not penalize existing customers in case of foreclosure charges and pre-payment penalties.