RBI lowers repo rate from 8% to 7.75%.
Analyse the economic value of this statement from the viewpoint of (i) the households, (ii) investors, and (iii) the economy.
RBI lowers repo rate from 8% to 7.75%.
Analyse the economic value of this statement from the viewpoint of (i) the households, (ii) investors, and (iii) the economy.
A cut in repo rate (the rate at which commercial banks can raise loans from RBI) is expected to be followed by a cut in market rate of interest (the rate at which the commercial banks offer loans to the people). It is expected to impact the households and investors, and the economy as given below:
(i) Impact on Households: A cut in market rate of interest (followed by a cut in repo rate) is expected to induce borrowings for the purchase of consumer durables, as well as houses and flats. Also, the existing loans (raised against a floating interest rate) will now attract lower EMI, implying a direct monetary benefit to the households.
(ii) Impact on the investors: As a result of a cut in the market rate of interest, the cost of borrowings (implying the cost of capital) will reduce. Accordingly, investment is expected to increase across all areas of production activity.
(iii) Impact on the economy: When demand for consumer durables rises, aggregate demand is expected to rise. Aggregate demand also tends to rise when investment expenditures are significant components of aggregate demand. Thus, the level of planned output is expected to rise along with the level of planned purchase in the economy. Accordingly, the equilibrium GDP level is expected to rise, implying a rise in the growth rate of GDP.
A cut in repo rate (the rate at which commercial banks can raise loans from RBI) is expected to be followed by a cut in market rate of interest (the rate at which the commercial banks offer loans to the people). It is expected to impact the households and investors, and the economy as given below:
(i) Impact on Households: A cut in market rate of interest (followed by a cut in repo rate) is expected to induce borrowings for the purchase of consumer durables, as well as houses and flats. Also, the existing loans (raised against a floating interest rate) will now attract lower EMI, implying a direct monetary benefit to the households.
(ii) Impact on the investors: As a result of a cut in the market rate of interest, the cost of borrowings (implying the cost of capital) will reduce. Accordingly, investment is expected to increase across all areas of production activity.
(iii) Impact on the economy: When demand for consumer durables rises, aggregate demand is expected to rise. Aggregate demand also tends to rise when investment expenditures are significant components of aggregate demand. Thus, the level of planned output is expected to rise along with the level of planned purchase in the economy. Accordingly, the equilibrium GDP level is expected to rise, implying a rise in the growth rate of GDP.
