In a welcome move the RBI, the governing authority in the country made the first cut in policy rate. And this cut was the first one in three years.
The Reserve Bank of India announced its first cut in three years at Delhi, the bank’s head quarters. The cut was beyond expectations of the financial institutions. As per the announcement RBI cut repo rates by 0.50 per cent to 8.0 per cent. Repo rate is the rate at which banks borrow money from RBI. And most financial analysts feel that the banks shall pass on approximately 0.50 percent to the customers. The bold move is much appreciated by the analysts and the banks who are the stake holders in the financial sector of the country. However, there is "limited space for further reduction in rates", RBI Governor D. Subbarao said, adding that upside risks to inflation persists.
Whatever be the technicalities it is a blessing in disguise to the common man. Because the translation simply means that home loans, car loans, personal loans could get cheaper to some extent.
In another linked development the RBI announced abolishing the foreclosure charges, more commonly known as prepayment penalty on home loans. That simply means that the borrowers need not pay the penalty interest if they wish to pre pay their existing home loans. With this clause in place the borrower could also transfer the loan to any other bank without attracting any penalty. RBI regulation will ensure uniformity across the banking system. This is an advantage for loans taken on floating rate of interest. It may be noted that the RBI in the last two years increased the repo rate, almost eleven times, which subsequently increased the installment of the loans taken. (With inputs from internet: AarKay)