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Will RBI Cut Interest Rate On Friday? Will Your EMI Come Down? Know In Details

Will RBI Governor Sanjay Malhotra announce a reduction in the repo rate at the end of the three-day meet?

Will the Reserve Bank of India (RBI) cut bank interest rates when its Monetary Policy Committee (MPC) meets February 5-7?

Will RBI Governor Sanjay Malhotra announce a reduction in the repo rate at the end of the three-day meet?

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Is the central bank confident of taming the inflation rate after food prices fell recently?

Analysts believe the RBI may end the FY 2024-25 by slashing the repo rate by 25 basis points.

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Will RBI Slash Repo Rate?

Repo rate is the rate of interest at which banks borrow money from the RBI. On the other hand, the reverse repo rate is the interest rate at which the central bank pays money to banks for the money they keep with it.

Generally, banks lower interest rates when the central bank cuts the repo rate because they get money at cheaper rates.

Keeping in mind the inflation rate, the RBI has not reduced the repo rate for the last 22 months.

Will Bank Interest Rate Come Down?

In the last bi-monthly meeting held in December 2024, the central bank did not cut the repo rate contrary to expectations and left it at 6.50%.

However, it reduced the Cash Reserve Ratio by 50 basis points and brought it from 4.50% to 4%.

The CRR is the ratio of money that banks must keep with the RBI, they can not use this money to give loans or buy securities or bonds.

The CRR is the mechanism to regulate liquidity in the finance market so that there is neither too much nor too less money.

What Is MPC?

In the last meeting held on December 4-6, the MPC decided to keep the repo rate unchanged by a 4-2 verdict. There are six members in the MPC- three are internal and three others are nominated by the union government.

While keeping the repo rate unchanged and slashing the CRR, then RBI Governor Shaktikant Das said that these steps were taken to
maintain the price stability. He also emphasised maintaining macroeconomic stability and creating buffers.

The RBI also slashed the expected GDP growth rate to 6.6% and the inflation rate to 4.8%.

Will Union Budget 2025 Encourage RBI?

As the inflation rate has been tamed to some extent and the Union Budget 2025 has made annual income up to Rs 12 lakh free of income tax, leaving more disposable money with the middle class, the banks have an opportunity to grab this surplus money.

Analysts believe, that while it may increase consumption, people may also put the surplus money in small savings. The banks are facing the problem of deposit crunch as the middle class has no money to save. On th other hand, the banks are facing the problem of increasing NPAs.

When three installments of a loan are not paid, it becomes the Non-Performing Asset or the NPA.

This is the most opportune time for the banks to attract deposits so that it has enough money to give loans to businesses, industries and people.

Experts believe the banks expect a cut of at least 25 basis points in the repo rate.

The State Bank of India has said in its report,”We expect a 25-basis point rate cut in the February 2025 policy. Cumulative rate cuts over the cycle could be at least 75 basis points, with two successive rate cuts over February and April 2025.”

MPC Meeting And Trade War

The RBI meeting will be held at a time when a global trade war is looming large over the world economy with US President Donald Trump announcing a punitive 10% tariff on the goods coming from China, Mexico and Canada. While Canada and Mexico retaliated by announcing an imposition of 25% tariffs on all US goods, China responded with 15% tariffs.

It has already left deep impacts on the world economy though the US has put a hold on these tariffs for one month. It hit hard other currencies as the US Dollar strengthened further. The Indian rupee also suffered as it plummeted to 87.20 against the greenback.

Analysts believe the RBI should focus on managing liquidity and the flow of the rupee because if dollars are sold, it will draw out liquidity.

Will Your EMI Come Down?

Experts have pointed out that if the RBI slashes the repo rate by 25 basis points and brings it to 6.25% as expected, external benchmark lending rates (EBLR) linked to the repo rate will come down by 25 bps. It may give much-needed relief to borrowers as their equated monthly installments (EMIs) may come down at least marginally.

If the repo rate is cut, commercial banks may reciprocate it by slashing interest rates on loans that are linked to the marginal cost of fund-based lending rate or MCLR.

If media reports are to be believed, the RBI may also announce the expected GDP Growth rate for the FY 2025-26.

HISTORY

Written By

Pramode Mallik


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