Source: DNA India

Reserve Bank of India has cut repo rate by 25 basis points. This will have a positive impact on the Indian economy as banks will lower their lending rates. You car and home loans are set to become cheaper.

Raghuram Rajan, Governor, Reserve Bank of India (RBI) surprised everyone on Thursday with a 25 basis points repo rate cut. The move sent the stock markets in India soaring with the Bombay Stock Exchange’s Sensex soaring 600 points in early trade. But what does this rate cut mean for you?

Cheaper loans
Since RBI cut the Repo rate with 25 basis points from 8% to 7.75% with the immediate effect, the banks are expected to follow suit and cut lending rates.

United Bank of India has already announced a similar 25 basis points drop in its base rate. The base interest rate of the Bank now stands at 10%.

India’s largest bank, State Bank of India (SBI) has already indicated a rate cut. HDFC Bank, too, has intimated the same.

With more banks expected to follow with their lending rate cuts, your loans, like home- and auto-loans will get cheaper.

For India Inc
The industry has  been demanding a rate cut  by the RBI to boost investment and demand growth. With this surprise rate cut, banks and non-banking financial companies will have more cash to lend as the repo rate cut will infuse much needed liquidity in the market.

Corporate loans, too, are set to get cheaper and  hence the expected disbursement of those will increase.

Moreover, as the Narendra Modi government withdrew excise duty benefit from the auto sector forcing car and two-wheeler makers to increases prices by 1-5%, this rate cut will help bolster sales as consumer loans are set to get cheaper.

GEPL Capital, in its note dated January 15, 2015, said, “Rate cuts will also prove to be boon for the Real estate and Infrastructure sector. Controlling the inflation and reducing the loan amount will encourage the customers to invest in the sector and higher participation will increase the volumes.”

Raghuram Rajan has clearly indicated that this repo rate cut is a shift in the policy stance of the RBI and the Bank will continue on this path.

What this effectively means is that RBI will cut rates further in the due course of this year making loans more affordable.

The World Bank has already indicated that it expects India’s GDP to grow at 6.4% in 2015 and likely to catch up with China in 2016 and 2017.

With wholesale inflation at 0.11% in December and retail inflation at 5%, the RBI has the room to give more cheer to the market in the coming days.