What is a Rate Cut?
A rate cut refers to a reduction in the repo rate, which is the rate at which the RBI lends money to commercial banks. If banks get money at a cheaper rate from RBI, they will also try to lend money to people and businesses at lower interest rates. This is done to encourage more people to take loans, buy homes, invest in businesses, and spend more, which helps the overall economy grow.
Why Does RBI Cut Rates?
When the economy is slow, like low spending, low business activity, or job losses, the RBI may cut rates to make borrowing cheaper, so that more money starts flowing into the system. But if the rate cuts keep happening frequently or go too low, it can flood the economy with too much money and increase inflation.
How Does it Affect You?
1. Borrowers:
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Home loan, car loan, and personal loan rates tend to drop.
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EMIs may reduce, giving you more disposable income.
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It’s often a good time to consider refinancing existing loans at lower rates.
2. Investors:
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Fixed deposit (FD) interest rates usually decline, leading to lower returns for traditional savers.
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Debt mutual funds, especially long-duration funds, may see capital gains due to falling interest rates.
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Equity markets often react positively, driven by expectations of better profitability for companies and improved liquidity.
What Should You Do?
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Reevaluate your fixed income investments. If FD rates are unattractive, consider suitable debt mutual funds and shift to equity mutual funds for long term investments.
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Long-term equity investments may benefit as lower rates support economic growth. Lower loan rates makes more cash flow in the economy
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Review your loan structures. It might be time to shift to lower-rate options if available.
At Vipulam Financial Services, our job is to guide you through these changes. Whether you are an investor, a borrower, or both, we’re here to help you make the most of every market movement.
Have questions or need personalised advice?
Get in touch with us today.