What investors and borrowers should do after RBI rate cut?

Updated: Tuesday, March 19, 2013, 11:20 [IST]

The Reserve Bank of India today decided in its Monetary Policy Review to cut the repo rate by 25 basis points or 0.25 per cent. This means that interest rates in the system, be it lending or borrowing rates are headed lower. RBI controls interest rates in the system through the repo rate - a rate at which it lends money to banks.

Here's what a borrower should do after the RBI rate cut

If you are planning to take a personal loan, auto loan, gold loan or education loan, do wait for sometime if you can. This is because a drop in the repo rate by the Reserve Bank leads to a drop in costs for banks, which then tend to drop the interest rates on loans.

Do remember that banks would examine their own asset-liability match before dropping rates and it depends a lot on other aspects like liquidity. But, today's action broadly means that interest rates are trending lower. Of course, home loan borrowers who are on a floating rate need not bother as the floating rates would fall automatically.

Here's what an investor should do after the RBI rate cut

An investor looking to invest in fixed deposits, should do so immediately, before banks drop their interest rate. As indicated earlier, it may not necessarily mean that banks drop their interest rates, but rates are surely trending downwards.

Also, one should invest for a longer tenure given that interest rates in the economy are expected to fall further. In fact, analysts believe that the Reserve Bank would continue to drop rates, which means that one can expect at least a further 75 to 100 basis points cut this year.

Investors would hence do well to go in for a longer tenure deposit.

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