Opinion | How much of RBI’s rate change will get transmitted to the real economy
With RBI likely to reduce interest repo rate, lending rate may also come down
Interest rate means various things to various people. To a business person, it means the rate at which she takes a loan from the bank. To a retiree, it means the rate at which she places a deposit with the bank. To a market expert, like a fund manager or a bank treasury manager, it means the yield level on government or other bonds. To a policymaker at the Reserve Bank of India (RBI), it means the signal given out in the form of overnight repo rate. The impact of movement of interest rates in the economy depends on which side you are: if you are a borrower, the lower the better, and if you are a saver, the higher the better. From an overall perspective, lower interest rates are better because they induce borrowers to take more loans. If an industrialist is taking loans, she is creating capacities, which will expand the gross domestic product (GDP) of the country. If an individual is taking a housing loan, it’s about building houses i.e. creating demand. If interest rates are high, it may induce people to save, but the savings need to be put to productive use.