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It is that time of the year again. All the news channels and papers are busy covering the latest news about Reserve Bank of India’s most recent base cut. Economists all over are applauding and rejoicing this happy news, and then there are those, like me, who are completely lost. So here is your guide to understand what exactly this base rate is and how it affects you!
1. What is base rate Base rate, as the name suggests is the basic rate or the minimum rate applicable. The base rate that is set by Reserve Bank of India is the basis on which all the banks have to set their interest rate. Every bank’s earning is through its interest rate, however when the base rate is cut, banks have to reduce the interest that they charge.
2. Why is it important? In any country, banks play a vital role in showcasing the stability of our economy. When RBI cuts the base rate, it shows that our economy is improving. This is because base rates and interest rates come down when inflation comes down. Thus the recent set of base rate cuts indicates that India’s rate of inflation is coming down.
3. What is base point?
Base point is the unit used by the Reserve Bank of India to calculate base rate. Ideally a rate cut of 25 BPs helps to reduce the interest rate by 0.25%. If we take an example of a loan of Rs. 100 at 12.5% interest rate, the interest paid will be reduced by Rs. 0.25.
4. Why does it matter? While the change may seem small in the above example, loans are often taken for much bigger amount. Thus the cut in base rate will save twenty five paise for every hundred rupees spent on interest. This reduces the stress of EMIs and interests considerably.
5. Will prices reduce? After pondering over this series of rate cuts, it is normal to wonder if inflation has diminished and if prices of various commodities will go back down. Sadly, that will not be the case. Instead, these rate cuts will help increase our spending capacity.