The Impact of RBI Rates On You And Me

Most people tend to look over announcements made by the Reserve Bank of India (RBI) such as changes in interest rates, led by the impression that their personal financial positions are not going to get affected by such changes. Moreover, many find them too complex to understand as well. But looking at a few changes the RBI announces from time to time, their impact on the average person's budget can be easily understood.

Repo rate hike:

This is the rate at which the RBI lends money to the banks. If the Repo rate were to be raised even by 0.5%, interests on home and auto loans offered by banks would go up because the interests over them are directly proportional to the Repo rate. In other words, the Repo rate can increase the interest rates on loans being offered by the lenders in the range of 0.5% to 1%.

For instance, if an interest of an annual 10% was being charged for a home or auto loan, it would increase to at least 10.5%, raising the EMI amount in the process.

Repo rate hikes would particularly affect customers who had opted for floating interest rates at the time of taking the loan. The RBI, in fact, raised the Repo rate from 5% in May 2010 to 7.25% this year and this would affect the EMI amounts that customers will have to pay now.

Saving bank interest hikes:

Another change that affects the finances of ordinary people is that of increasing the saving bank interest rates by the RBI. Banks used to offer an interest of 3.5% on savings but the RBI increased the rate by 0.5% in 2011. This means that customers will earn more on their savings but it affects the banks' business and profitability. They will have to pay 4% interest in all savings which would weigh down on their margins. Banks do business to earn profits and to give away 0.5% of their profits is a huge amount. About 22% of the money in banks comprises normal saving accounts and this is around Rs10,00,000-crores. So deducting 0.5% of the amount would work out to Rs5,000-crores.

However, the banks will not bear the burden of such a huge depletion from their profits but pass it on to their customers, especially those who approach them for loans. Therefore, even though people who put their money in banks as savings may stand to gain, any change by the RBI affects the common man eventually.

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