RBI rate moves nearly always result in a series of standard queries. The Reserve Bank of India’s rate drop on Thursday has raised the same set of concerns, if one considers the most recent example as well: Will my EMI decrease? Should I put off repaying my house loan? Will rates for deposits decline? And the same response applies to all three: magic does not happen right away. In this column, let us examine these queries.
A policy rate decrease is undoubtedly significant, but it is hardly a sudden adjustment. Consider it similar to loosening a big ship’s steering wheel. Now you turn it, but the ship reacts slowly. Monetary policy operates precisely in this manner.
The repo rate was lowered by 25 basis points by the RBI to 5.25 percent. Additionally, it pledged to use open market operations to inject one lakh crore rupees into the banking sector. The goal of both choices is to eventually lower borrowing costs. However, banks do not immediately change their own rates when the governor concludes his speech.
They consider their cost of finances. This includes the amount of money they pay depositors, the amount of cash they hold, and the degree of tight or loose liquidity.
The RBI gave the liquidity boost for this reason. The rate decrease would not have gone very far on its own without it. Banks feel more at ease cutting lending rates as liquidity increases. Even so, the reaction is erratic. For example, home loan EMIs could somewhat decrease over the coming weeks rather than in the coming hours. It can take much longer for small borrowers and MSMEs.
The shift is likewise gradual for savers. Deposit rates will not abruptly drop. In the intense competition for deposits, banks do not want to alienate clients by making hasty cuts. Inflation is the biggest concern for savers. The good news is that, despite a slight softening of deposit rates, the actual value of your savings is safe since inflation has fallen to all-time lows.
The response in markets also follows similar pattern if you monitor them. Because the bond market reacts promptly to RBI signals, bond yields decline first. A combination of mood, earnings, and global cues influence equity markets. Although it does not change the script, a rate cut is helpful.
If 25 basis points does not instantly change anything, then why is it such a huge deal? as momentum is a key component of monetary policy. It informs customers, banks, and companies about the direction of the wind. Today’s action marks the beginning of a cycle where borrowing prices may trend lower for a time after months of waiting—as long as inflation remains moderate.
The direction, not the pace, is what counts. Both a sharp increase in borrowing and a sharp decline in deposit rates are undesirable to the RBI. It seeks a gradual, regulated change that supports the economy without jeopardizing stability.
For the typical reader, the message is straightforward: you will benefit from the rate decrease, but not immediately. Your credit may seem a little softer, your EMI will decrease, and deposit rates may somewhat soften. However, monetary policy is not a recent development. Today was only the beginning of a slow-moving process.
