RBI’s Cut in Repo Rate Spells Relief for Borrowers, Pleases Fintech and Real Estate

Some relief for borrowers as the Reserve Bank of India (RBI) has decreased the key policy rates by 25 basis points (bps) in its bi-monthly monetary policy that was held on February 7. One basis point equals one hundredth part of a percentage.

The RBI press release said that the Monetary Policy Committee (MPC) decided to “reduce the policy repo rate under the liquidity adjustment facility (LAF) by 25 basis points from 6.5 per cent to 6.25 per cent with immediate effect,” owing to an assessment of the current and evolving macroeconomic situation.

Repo rate is the rate at which a central bank of a country lends money to commercial banks when a shortfall of funds is experienced. Monetary authorities use repo rate to control inflation.

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As a result of the change, the reverse repo rate under the LAF now stands modified to 6.0 %, and the marginal standing facility (MSF) rate and the Bank Rate to 6.5 %. Also, the MPC has changed the monetary policy stance to neutral from ‘calibrated tightening’, as was maintained in the previous two meetings held in October and December 2018.

The RBI has not introduced a cut in the rate since August 2017. In fact, the rates spiked by 25 bps twice in June and August 2018. The cut has been welcomed by the real estate and fintech sector, because decreasing the repo rate is likely to give a push to prospective home buyer’s sentiments, which in turn, will lead to a boost in the housing sales.

Honey Katiyal, CEO and Founder of the real-estate consulting company, Investor’s Clinic, told The Tech Panda, “The decision taken by RBI to cut the repo rate by 25 basis points is a welcome move. Once the benefits of this reduction will pass on to the existing home loan borrowers, the burden of loan EMIs will eventually lower down. This cut was awaited for a long time. Moreover, it will create a positive impact on the overall real estate market. The property market is already in a happy-go-lucky mode after the recent budget announcements, and with this rate cut, the morale of the developers will further boost to a large extent.

Puneet Chandra, Founder and JMD, of the managed office solution provider, Skootr, told The Tech Panda, “The rate cut will not only facilitate economic growth but also kickstart the stagnant Real Estate sector, which has been given a host of benefits in the present budget. It will bring about a positive boom in the industry and relaxation for the end users. By bringing in more liquidity in the system it will ease the inflation. Hope that banks would pass the benefits till the very end of the chain; it will benefit the economy as a whole.”

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Raghavendra Pratap Singh, Co-Founder of the P2P lending platform, i2iFunding, told The Tech Panda that this was an inevitable step as inflation has been kept in control for the past 12 months.

“We welcome this good and progressive step taken by RBI. The central bank has changed its stance to “neutral” from “calibrated tightening”, which means there could be more reduction in the coming months if inflation remains within acceptable limits.”

Repo rate is the rate at which RBI lends money to banks. A reduction in repo rate will make sure that banks also reduce their lending rates, which will lead to affordable credit to MSME and retail customers.

“This step will help P2P Lending platforms attract more lenders, as deposit rates may go down as well, which will make fixed deposits unattractive. Overall, a big boost to economy in election year, which would be favourable to incumbent government,” he added.