The RBI has quite aggressively lowered the repo rate by 50 bps and reduced the CRR (cash reserve ratio) by 100 bps to lower overall interest rates in the economy and provide durable liquidity to the system. The CRR cut will release around Rs 2.5 lakh crore in 4 instalments. These were surprises for the market, as it was widely believed that there would be a 25 bps cut in the repo rate and not 50 bps. Further, with the liquidity framework in place, the CRR was not considered a possible measure, as liquidity was induced through the VRR (variable rate repos), OMOs (open market operations), and forex swaps.

What does this mean going forward? The first is that there may not be any more cuts in future, as this has been frontloaded. With the RBI targeting an inflation rate of 3.7% (with Q4 being 4.4%), for a real rate of 1.5% to be preserved, a repo rate of 5.5% looks reasonable. While the inflation rate will remain in the 3% range for longer, it must be pointed out that the inflation rate has been low largely due to the base effect and would tend to get reversed towards the latter part of the year.

But given that interest rates will move down in the coming months based on a repo rate of 5.5% (which will probably not go down further), the following could be the implications. Individuals who have taken home loans will see their interest........

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