IMPACT O

F PRESENT RATE

CUTS BY URJIT PATEL

V A S A N T H R E D D Y

P R E E T H A M D E V I S E T T Y

N I S H I T G O T A N

WHO IS URJIT R. PATEL ?

Urjit R. Patel (born 28 October 1963) is an Indian economist, consultant and banker, currently serving as Governor of the Reserve Bank of India (RBI). As the Deputy Governor of RBI, he looked after monetary policy, economic policy research, statistics and information management, deposit insurance, communication and Right to Information.

WHAT IS MONETARY POLICY ? 

It is the process by which the Monetary Authority of a country controls the supply of money, often targeting an inflation rate or interest rate to ensure price stability and general trust in the currency.

Further goals of a monetary policy are usually to contribute to economic growth and stability, to lower unemployment and to maintain predictable exchange rates with other currencies.

WHAT IS INTEREST RATE ?

It is defined as the proportion of an amount loaned which a lender charges as interest to the borrower, normally expressed as an annual percentage. It is the rate a bank or other lender charges to borrow its money, or the rate a bank pays its savers for keeping money in an account.

WHAT IS INFLATION RATE ?

The inflation rate is a measure of changing  prices, typically calculated on a month-to-month and year-to-year basis and expressed as a percentage.

The Reserve Bank of India (RBI), headed by the newly appointed governor Urjit Patel, cut interest rates by 25 basis points in a bid to spur growth. The repo rate at which the central bank lends to commercial banks – has come down to a six-year-low of 6.25 percent and resultantly, the reverse repo rate has also come down by the same percentage.

The decision to cut rates came at a time when consumer inflation eased to a five-month low of 5.05 percent in August 2016 on the back of lower rises in the prices of vegetables and pulses. But inflation in July was at a 23-month high of 6.07 percent. 

The stock markets rallied briefly after the announcement of the rate cut, but saw a pull back immediately after that. The benchmark 30-share Sensex index ended up 0.32 percent to 28,334.55 points.

WHY DOES RBI CUTS INTEREST RATE?India's IIP growth has been negative for past 15 months.

Economic signals from around the world are gloomy. Now to revive the demand situation of Indian economy and RBI

has to release money in the economy. This is done by rate cut.Rate cut increases the supply of money to Bank's. Banks slush

with funds resort to reduction in interest rate to attract more prospective customers. Interest rate reduction not only helps the prospective customer but also benefits the present customer.

WHAT ARE ITS IMPACTS ?This implies a reduction in the rate helps banks borrow

money at a cheaper rate and vice versa. Whenever banks have any shortage of funds, they can borrow from the RBI.

Similarly, the reverse repo rate which stands at 6% is the rate at which RBI borrows from banks.

Therefore, when the interest rate is low, lending by banking system becomes a bit cheaper, leading to a fall in EMI, thereby providing a boost to industry and economy in overall.

Effect on consumers: Naturally, a fall in the interest rate prompts one to save less and spend more. Due to low interest rate, loans, particularly home loans will see a rise and this benefits the real estate market.

Start-ups :can also avail loans at a lesser rate as banks and other lending institutions compete with each other to offer loans at the most favourable rates.

Price of commodities: It is not necessary that prices of commodities have to come down wheninterest rates go down. But if it does, it is beneficial to invest in say gold or appreciating assets such as real estate and book profits when they rebound, rather than spending on consumables.

Job market: When capital becomes cheaper, companies tend to expand their operations, thus, generating employment as they would need more manpower. This, coupled with government reforms will increase industrial output, and hence Gross Domestic Product.

 

Equity Markets: The positive impact on consumption along with lower interest outgo would also mean high profits and thus better valuations for the equity market. Further, lower interest rates means that money will move from lower yielding debt instruments to the risky, but high return yielding equity market.

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