Rate Cut: Will He or Will He Not?

A rate cut by the Reserve Bank of India (RBI) refers to the reduction of the key interest rates, particularly the Repo Rate

The first meeting of the newly-formed Monetary Policy Committee (MPC) under RBI Governor Sanjay Malhotra begins today, with markets eagerly anticipating a potential rate cut. The RBI is likely to reduce the repo rate by 25 basis points to stimulate growth amidst sluggish consumption. The benchmark interest rate, which has been steady at 6.5 per cent since February 2023, has not been cut since May 2020. The rate decision will be announced on Friday, February 07, 2025.

What is a Rate Cut by the RBI?

A rate cut by the Reserve Bank of India (RBI) refers to the reduction of the key interest rates, particularly the Repo Rate, at which commercial banks borrow money from the RBI. This move is aimed at influencing the economy by making borrowing cheaper and encouraging spending and investment.

Why Does the RBI Cut Rates?

1. To Stimulate Economic Growth: When the RBI cuts rates, it makes loans cheaper for businesses and individuals. This encourages borrowing and spending, helping to boost economic growth, especially during times of economic slowdown.
2. To Control Inflation: Although the primary purpose of a rate cut is often to support growth, the RBI may also use it to manage inflation. Lower interest rates can encourage spending and investment, which can help balance demand and supply in the economy.
3. To Support Employment: Lower rates can also lead to more job creation. When businesses can borrow more easily, they may expand operations and hire more people.

How Does a Rate Cut by the RBI Affect You?

1. Cheaper Loans: If you're planning to take a loan, like a home loan or car loan, a rate cut from the RBI lowers interest rates, reducing your monthly payments.
2. Lower Returns on Savings: On the flip side, a rate cut generally means lower interest rates on savings accounts, fixed deposits, and other investments, which reduces the returns you earn.
3. Boosted Spending: With cheaper loans, both consumers and businesses are likely to spend more, stimulating the economy.

When Does the RBI Cut Rates?

The RBI typically cuts rates during periods of economic slowdown, such as a recession or when inflation is under control. For example, during the COVID-19 pandemic, the RBI reduced rates to support economic recovery.

A question arises: Will RBI Governor Sanjay Malhotra cut the rate or not? Do let us know your thoughts in the comments below

Disclaimer: The article is for informational purposes only and not investment advice.