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Tuesday 28 January 2020

Repo rate cut again? Maybe, but when will my EMI reduce?

The repo rate has been reduced on multiple occasions in the past; however, banks are reluctant to pass on the benefit proportionately to customers

New Delhi: If all goes well, once again the EMI against your loan may reduce. Governor of the Reserve Bank of India Shaktikanta Das has indicated there would be another reduction in the repo rate.

Das said, “Today we are seeing that prices are stable. Inflation is far below 4%. We expect inflation to remain down for the next 12 months. In such a situation, especially at a time when growth has softened, there is some scope for further reduction in the policy rate.” However, he declined to say anything about the RBI’s estimate of the current financial year growth. He said that whatever is to be said on this will be made public with the announcement of monetary policy review on 4 October.

The three-day review meeting of RBI’s Monetary Policy Committee is starting on 1 October. The RBI reduced its policy rate (aka repo rate) four times this year. On 7 August, the central bank had reduced the repo rate by 35 basis points (bps) to 5.40%. The previous cut was announced in June. The one before that was announced in April. There had been repo rate cuts in the previous years, too. However, lenders like banks have been noticed to be quite reluctant to pass on the benefit proportionately to common, middle-class borrowers.

Proposal of repo rate cut inspired by response to corporate tax cut?

On Friday, the Union government announced a cut in the corporate tax. According to Das, after this decision of the government, foreign investors are turning to India. The RBI governor said, “This is a very bold and positive step. As far as international investors are concerned, corporate tax rates in India have become very attractive compared to emerging markets in ASEAN countries and other parts of Asia. In my opinion, today India has reached a very strong position in the competition. This will attract more investment.”

Das sees the government’s decision as a booster for domestic investors as well. He said that companies would now have more money left to increase capital investment. On savings, he said some companies would increase their investment and some may reduce their debts. This will improve their balance sheets according to him.

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