Explained: Pros and Cons of the Low Interest Rate Regime
The Reserve Bank of India (RBI) on Wednesday decided to leave key interest rates unchanged in its latest bimonthly policy review. This is the sixth time in a row that the RBI’s Monetary Policy Committee has decided to hold rates.
The RBI kept the repo rate and the reverse repo rate at 4 percent and 3.35 percent, respectively. Economists generally expected the RBI to keep the repo rate unchanged.
Experts have said that a low interest rate regime is good for a recovering economy as it will lead to increased spending, consumption and growth.
Lower interest rates will encourage people to borrow and spend more. However, there are also drawbacks associated with low interest rates. Here’s all you need to know:
Since the repo rate is at its lowest in the last two decades, it is simply good for people who want to borrow from banks. This means that people who want to borrow money from the bank will be able to get a lower interest rate.
It also means that equivalent monthly loan payments – tied to the marginal cost of funds (MCLR) based lending rate or external referral rates – will remain low for clients.
At a time when monthly household incomes have taken a hit due to the Covid-19 pandemic, this will be beneficial for individuals paying off existing home loans.
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Lower interest rates will also have a positive effect on the real estate and housing industry, as more people will look to buy properties due to nominal borrowing rates. Likewise, it will also help the real estate industry.
Ankush Kaul, President (Sales and Marketing) – Ambience Group, said: “Mortgage interest rates in India have been the lowest over the past two years, resulting in a significant upturn in transactions across all sectors. housing categories – affordable, mid-range and luxury. As the umbrella bank has kept rates unchanged, we expect housing demand to continue on its upward trajectory in 2021, and the broadly positive economic indicators will further help homebuyers to close and finalize. “
While a low interest rate regime can lead to increased consumption and growth, it can seriously disrupt household savings.
Lower rates are bad for those earning interest on a savings account, term deposit, or any similar program offered by banks.
If interest rates stay low, these savings plans don’t generate decent returns. Simply put, higher interest rates will encourage savings as they will generate higher returns on investment in the programs offered by banks.
Since low interest rates will not attract higher investment, it could also lead to lower bank deposits and ultimately impact bank profitability. However, it can be noted that the volume of bank deposits is not always impacted by a low interest rate regime.