Table of Contents
WHAT IS INTEREST RATE?
- An interest rate is the percentage of principal charged by the lender for the use of its money.
- Banks pay you an interest rate on deposits.
- Banks charge borrowers a little higher interest rate than they pay depositors so they can profit.
- 35 bps- 4members
- 25 bps- 2 members
- Accomodative Stace
REPO RATE
- Repo rate also known as the benchmark interest rate is the rate at which the RBI lends money to the banks for a short term.
- When the repo rate decreases, borrowing from RBI becomes cheaper.
- After the rate cut, EMIs on home loans and other loans will come down significantly.
- Reverse repo rate is 25 bps lower than the Repo Rate.
WHAT HAPPENS DURING SLOWDOWN IN ECONOMY?
- Central Bank keep reducing the policy rate, it makes the borrowing cheaper from the banks.
- Hence more investment and expenditure.
- Thus more output and higher growth.
WHAT IS NEGATIVE INTEREST RATE?
- It is when a country’s central bank pushes its policy rate below zero.
- It refers to a scenario in which cash deposits incur a charge for storage at a bank, rather than receiving interest income.
- Instead of receiving money on deposits in the form of interest, depositors must pay regularly to keep their money with the bank.
- So does it mean you earn interest when you borrow money from bank?
- No, the bank doesn’t pay the interest, instead they charge almost 0%.
- It is a kind of psychological message by the central bank to the citizens to spend and invest more in the economy rather than saving into the bank.
HAS IT HELPED IN INCREASING GROWTH?
- The policy has brought some success initially in Europe when the European Central Bank (ECB) adopted negative rates in 2014.
- But it has failed to bring any success in countries like Japan where negative rates were adopted in 2016.
- Thus it’s still not clear if the policy work to increase the growth rate of economy. What Is Negative Interest Rate?
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