Aug 03, 2017 3 min read

RBI Cuts the Repo Rate by 25bps! Know its Impact on Your Investments

RBI finally cut the Repo rates by 25 basis points! How will it impact on your investments?
As announced in the third bi-monthly monetary policy statement, the Monetary Policy Committee (MPC) has reduced the Repo rate under the Liquidity Adjustment Facility (LAF) by 25bps to 6 percent from 6.25 percent with immediate effect on August 02, 2017. Furthermore, with this change, the Reverse Repo rate stands adjusted to 5.75 percent.

Repo rate is the interest rate at which the central bank of a country lends money to the commercial banks during any shortfall of funds. By providing funds at a low rate the central bank tries to bring an upliftment in the economy of the country. However, this rate is the lowest since November 2010; it will bring many opportunities for several sectors. This action of RBI of cutting down the rates will bring huge changes in the various sectors.

The Impact of RBI Rate Cuts on Various Investments:

  • Growth in Real Estate Sector : As the Repo rate reduced, it will result in a deduction of the interest rate on loans. So, the potential home loan customers will be blissful as it brings down their borrowing costs. Furthermore, it will attract more customer to buy home loans, leading to charming growth in the real estate sector. Thus, this action will have a great impact on the housing industry leading it toward growth. So, the investors who invested in the schemes of this sector will enjoy a decent rise in the value of the stocks.
  • Less Income From Savings Account! Switch to Liquid Funds : After the rates cut by RBI, the commercial banks are also forced to provide loans to their customers at a depreciated rate. Due to this, the banks will tend to lower down the interest rate on savings account and deposits in order to balance the financial statements. This situation is going to be more tragic for the people who keep their hard-earned money with bank deposits, where inflation and interest are at equilibrium. This will affect various money instruments negatively resulting in loss of the time value of money. On the contrary, many long-term debt funds witnessed an upward movement of 2-4% providing the investors with better returns. Furthermore, liquid funds are also beneficial for this time as they provide superior returns than the savings account. Thus, the idea of earning from bank deposits and savings account is not going to work better, rather you should switch to liquid mutual fund which offer multiple benefits and provide superior returns ranging from 7-9%.
  • Impact on Long-Term Bond Fund : The fundamental truth says that the yields of bonds are positively related with Repo rate and it has an inverse relationship with the prices of bonds. Which means the bond prices witness higher positive movement during consecutive rate cuts. Therefore this rate cut has given good scope to the debt investors to earn high returns on the long term maturity debt funds, beating the benchmark and FD Returns.
  • Impacts on Equities : The development of a country and the Repo rate are inversely related to each other. Thus, to accelerate the development of the economy, the central bank reduces the interest rates on loans. The lower rates allow business industries to expand their business and capacity by increasing its credit limits. Many new entities also get a chance to get their existence and expansion. It brings many new opportunities in the market of equities for the investors to grab high profits.

Moreover, this change in the Repo rate will have many positive impacts on the economy of the country because it will allow flowing more cash toward development. For the mutual fund investors, the infrastructure sector may be a good bet, and for those who want to earn superior returns than the savings account, Liquid Mutual Funds are the best choice.