
Reduction in repo rate - Benefits for consumers on EMIs


The think tank of the economy believes that the recent addition to the total stimulus provided by RBI this year will cushion the decline in the economy and swift monetary transmission in the pockets of customers due to replacement of Marginal Cost Lending Rate with external benchmark as it will faster the benefits will help in credit pick up in the economy but a reduction on their Fixed Deposits could dent their confidence.
While, the fifth consecutive cut from the eight-member led MPC committee has signaled a failure from government to uplift the economy but a cherry for the customers due to reduction in their
External Benchmark, which will boost their consumption by providing higher liquidity due to reduced EMI on their borrowingsthat will be used either for direct consumption or investing for surplus.
Benefits of reducing the EMI’s for consumers:
1. Cheaper Home loans: For long, the Indian economy was demanding major discount on buying homes due to rising culture of nuclear family but the previous tools of determining the borrowing rates were insufficient to pass on the benefits of reducing repo rate as the banks were getting a small portion of their total funds from central bank on the repo rate policy. But, the later introduction of External benchmark that will swift the benefits direct to customers and one more recent rate cut is going to work as a catalyst to push the demand of home loans.
2. Attraction for New Borrowers: The reduction in monthly installments that is expected to pass on as upcoming floating rate loans will be automatically link to external benchmark. The advantage of reduced EMI’s will attract more borrowers while will push the credit in the economy.
3. Infusion to various investment avenues: The effect of reduced EMI’s is likely to keep the customers left with an addition of liquidity. Keeping the direct consumption expenses constant, the customers will left with single alternative of channelizing their surplus funds into most productive investment avenues.
4. Pick up in direct consumption: Slippages in the EMI’s by consumers to their respective banks is going to boost the consumption of the customers in addition with progress in standard of living. The addition in total disposable income of the customers will shift them to luxuries.
5. Shift from saving to investment: The reduction in repo rate will not decrease the borrowing rates in isolation but a fall in Fixed Deposits will come in conjunction, which will disappoint the risk-averse investors. This will turn the consumers to parking their funds in other investment avenues rather than sticking with safe-haven Fixed Deposits provided by commercial banks.
6. Benefits for Existing Customers: More stimulus provided by central bank due to one more rate cut will benefit the existing customers to get the advantage of the spread in prime lending rate and risk premium charged by various banks. By simulating a comparative analysis of risk premium and spread charged by the banks in addition with external benchmark, customers will achieve premium.
Benefits of reducing the EMI’s for consumers:
1. Cheaper Home loans: For long, the Indian economy was demanding major discount on buying homes due to rising culture of nuclear family but the previous tools of determining the borrowing rates were insufficient to pass on the benefits of reducing repo rate as the banks were getting a small portion of their total funds from central bank on the repo rate policy. But, the later introduction of External benchmark that will swift the benefits direct to customers and one more recent rate cut is going to work as a catalyst to push the demand of home loans.
2. Attraction for New Borrowers: The reduction in monthly installments that is expected to pass on as upcoming floating rate loans will be automatically link to external benchmark. The advantage of reduced EMI’s will attract more borrowers while will push the credit in the economy.
3. Infusion to various investment avenues: The effect of reduced EMI’s is likely to keep the customers left with an addition of liquidity. Keeping the direct consumption expenses constant, the customers will left with single alternative of channelizing their surplus funds into most productive investment avenues.
4. Pick up in direct consumption: Slippages in the EMI’s by consumers to their respective banks is going to boost the consumption of the customers in addition with progress in standard of living. The addition in total disposable income of the customers will shift them to luxuries.
5. Shift from saving to investment: The reduction in repo rate will not decrease the borrowing rates in isolation but a fall in Fixed Deposits will come in conjunction, which will disappoint the risk-averse investors. This will turn the consumers to parking their funds in other investment avenues rather than sticking with safe-haven Fixed Deposits provided by commercial banks.
6. Benefits for Existing Customers: More stimulus provided by central bank due to one more rate cut will benefit the existing customers to get the advantage of the spread in prime lending rate and risk premium charged by various banks. By simulating a comparative analysis of risk premium and spread charged by the banks in addition with external benchmark, customers will achieve premium.