Does 0.25 percent really matter? It does when it comes to interest rates. If Reserve Bank of India (RBI) decides to reduce policy rates by just 25 basis points, the common man, the borrowers to be precise, may have a reason to celebrate. A cut in repo rate, the rate at which RBI lends to commercial banks, is a signaling mechanism to the economy that the interest rates are going to go down. If banks decide to pass on the cut in interest rates, then it will be good for the common man. A 25 basis point cut in interest rates on loan products open up many doors of opportunity for the common man. Some saving on the interest front is the first thing that comes to one’s mind.

Let us understand with an example, let us say Suresh has decided to take a home loan of Rs 50 lakh for 20 years at 10 percent rate of interest. The equated monthly installment (EMI) amounts to Rs 48,251.

If the interest rate goes down to 9.75 percent, then the EMI works out to Rs 47,425, a saving of Rs 826 per month, as compared to a 10 percent home loan interest rate. Existing floating rate home loan borrowers can enjoy lower EMI due to lower interest rate.

This will enable the common man to borrow in order to satisfy his needs. However, if there is no change in interest rates, there is no need to lose any hope. The RBI meets after a gap of two months to review the interest rates.

(Source-http://www.moneycontrol.com)

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