The Reserve Bank of India (RBI) on Wednesday, cut its repo rate by 0.35 percent to 5.40 percent following its monetary policy review. Repo rate is the rate at which the RBI lends money to its clients (like banks and other lending businesses).

In the monetary policy review, the central bank decides to lower or increase or not make changes to the repo rate based on economic conditions in the country. In the present scenario where the country's growth has been seen slowing down, cutting down interest rates will mean reduced burden on banks who will also eventually reduce their interest rates, thus encouraging more people to borrow. When money circulated increases, this will mean higher economic activities. On the other hand, when rates are increased, it will encourage people to save more and deposit money in banks.

With a 35 basis points cut in interest rates, it is highly likely that banks would reduce interest rates on home loans, car loans, auto loans etc.

While theoretically the repo rate cut should mean a decrease in interest rates of retail loans like home loans, auto loans or personal loans, it is not always the case. The interest charged on these loans are based on MCLR (Marginal Cost of Funds based Lending Rate) set by banks. These are revised by the lenders periodically based on many factors, one of which is repo rate. Despite RBI repeatedly urging banks to pass on the benefits of the repo rate cut to customers faster, Indian banks have always lagged in making the transition or made a lower transition of say 0.10 percent cut instead of 0.35 percent.

It is therefore wise to not base your loan decisions on the outcome of the monetary policy review.