InvestorQ : Why did the RBI go for such a big rate cut and what could be the implications of this rate cut by the RBI?
Moii Chavate made post

Why did the RBI go for such a big rate cut and what could be the implications of this rate cut by the RBI?

Answer
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Sam Eswaran answered.
6 months ago


RBI did spring a surprise when it dropped the repo rates by 75 basis points from 5.15% to 4.40%. RBI also tweaked the spread to ensure that reverse repo rates were lower by 90 bps. Rate cuts are also likely to sharply bring down the bond yields in the Indian market and that will reduce the borrowing costs for Indian corporates across the board. However, there are three aspects to consider. Firstly, this is the lowest level of repo rate for India and that reduces the leeway for further monetary policy action. Secondly, rate cuts take time to translate into borrowing costs because small savings still pay too high rates. Till that reduces, the transmission will be below expectations. The one segment to benefit will be the banks and the mutual funds as they see an immediate appreciation in the value of bonds held by them. Of course, the mutual fund investors should also benefit in the form of higher NAVs on debt funds.