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8 reasons why RBI rate cut should make you smile

March 07, 2015 09:00 IST

Close on the heels of a perfect Union Budget comes the RBI's big bang rate cut, the second in this New Year!

Winds of Acche Din?

Well, fingers crossed, but here's why you must rejoice.

Photograph: Michal Svec/Creative Commons

Oh well, RBI Governor Raguram Rajan seems to be a friend of surprises. For the first time a rate cut was announced before the markets opened. It made morning news and the markets cheered the announcement. And of course there were a lot of what, when, why, how questions floating around after the early morning rate cut news.

Budget 2015 was focused on long term growth and development. Additional funds were allotted for factors which boost growth like infrastructure, skill development, etc. This was planned at the cost of raising the fiscal deficit target. However, what Finance Minister Arun Jaitley did promise, was lower borrowing rates. Dr Rajan's announcement was almost like an agreement nod on the budget plans. Though a rate cut was not an entirely unexpected move, the timing definitely was. Experts and analysts are of the opinion that another rate cut is expected sooner than later. This is good news.

Let's understand the overall impact of RBI rate cuts as another one may be on its way.

#1: A burst of positivity

And we have already seen a glimpse of it with the Sensex hitting 30,000 for the very first time and Nifty opening trade with a bang while breaching the 9,100 level. RBI rate cuts carry the sentiment that growth is being supported and that is cheered by all.

Winds of Acche Din?

Well, fingers crossed.

#2: Save more every month

The RBI rate cut impacts your pocket directly as banks bring down lending rates. With lower EMIs every month, cash in hand will increase. It's time to start researching for opportunities to invest. Or maybe save up to spend on your dream purchases like make a down payment for an apartment or buy a vehicle.

#3: Happy corporates

In line with the RBI rate cut, corporate loans will get cheaper too. Disbursements will increase and companies will flourish as more money is pumped in their business. The governor has already stated that this move has been triggered due to low indicators of production and credit off take.

We hope this rate cut gets things sorted now.

#4: Improved standard of living

More people will avail loans as the rates drop down. Real estate will see a boom with a drop in home loan rates. Same goes for vehicle loans.

Lower rates on car loans and the following drop in EMI will encourage more people to go in for the purchase.

We can expect to see an overall improvement in standard of living.

#5: Boosted investment opportunities

This move will make it easier for corporates to raise equity money, due to overall positive sentiments in the market. Investors will be attracted to invest in companies knowing that the government is pro-growth.

And what more could we ask for when our government is already promoting it with the Make in India campaign.

#6: Economic growth on fast track

When the leading rates are eased, liquidity is injected in the system. Production, consumption, demand and investments increase. The wheel starts spinning faster and places the economy on the fast track to growth.

Globally, India already has a perception, wherein we are considered as a fast growing economy. Investors have their eyes set on us and this move will only reinforce their belief. We can expect a positive response from investors which will make more resources available to foster growth.

#7: Invest in growth

Though we shall see a decrease in loan rates, it will be followed by a decrease in deposit rates as well. It's time to get a bit adventurous and invest in opportunities which are directly tagged to growth.

Since the policies are all growth centric, returns from these investments will accordingly be better than deposits in a bank.

Having said that, you must take an informed call after assessing the risks involved.

#8: Time to make strategic plans

We are living in exciting times as India braces itself and sets off on the growth path. It is also a time for us to sit back and analyse our financial plans.

Age old investment methodologies may not yield optimum returns in these times. Watch out for various investment opportunities wherein growth will impact positively. It's time to make those strategic changes for the times head.

The budget provided limited relief to tax payers, however this rate cut will definitely have a more soothing effect. However, the rate cut has been announced at a time when banks have constrained liquidity, due to year end.

Hopefully by April, the rate cut will be passed on to consumers and we should be able to see the direct impact on our lives. Happy to wait, aren't you?

The author is Co-Founder and Director Credit Vidya.

Abhishek Agarwal