KOCHI: The Reserve Bank of India has reduced the key interest rate, repo, from six to five and a half percent. This is the interest rate charged by the Reserve Bank on loans given to banks. With this, the interest rate on housing, auto, personal, corporate, agricultural and gold mortgage loans given to customers by banks will be reduced by up to half a percent. This is the biggest interest rate cut in five years.
Meanwhile, the Cash Reserve Ratio (CRR), the amount of money that banks have to keep with the Reserve Bank in proportion to their total deposits, has been reduced by one percent to three. With this, Rs 2.5 lakh crore will return to the banks. This will increase liquidity as it reaches the market through customers.
Reserve Bank Governor Sanjay Malhotra announced the relaxations after a three-day monetary review meeting. He said that the monetary policy stance has been changed from accommodative to neutral to boost economic growth and control inflation. The repo rate was cut by a quarter of a percentage point each in February and April. The total interest rate cut this year is one percentage point.
Low inflation helped
• Inflation fell to 3.12 percent, paving the way for interest rate cuts
• Increased liquidity in the market to boost GDP growth from 6.5
• Lower interest rates will revive the economic sector
Interest on deposits will also be reduced
Banks may also reduce interest on fixed deposits by up to half a percentage point. Since banks will have more money in their hands by reducing the reserve ratio, they will not be interested in collecting money from investors by paying extra interest.
Profit on Home Loan
Loan Amount ................. EMI (8.35%) ............ EMI (7.85%) ........... Profit
20 lakhs ..........................17,167 ......................16,542 ..................................Rs. 625
30 lakhs...........................25,750 ..................... 24,813.................................. 947
50 lakhs ..........................42,917........................41,356..................................1561
Profit on Car Loan
Loan Amount - Current EMI............. when there is 0.5% decrease - Profit
5 lakhs........................10,403 ...........................................10,282 ..................................Rs. 121