Interest rates in India

Interest rate is the amount or the price paid to the borrowers for any debt, debt capital and it is treated as the cost of money. To get a clear view regarding interest rates in India it is important to understand interest rates as it is the price of using money. Interest rates in every economy are the most closely watched variables in any economy. Interest rates are created by the financial institution, financial bodies and financial markets.

Their movements are reported daily by the news and social media as they directly affect our daily lives and have long lasting importance and consequence on the health and wealth of economy. Interest rates also affect the economic decisions of business, financial bodies, investors and households as the rate changes every day, sometimes even hourly.

The rate also helps to decide whether to use their funds to invest their funds in estate, new equipment etc. for good return of their money. These also affect personal decisions like whether to consume save, or invest. This interest rate in simple language is the amount charged by a lender to a borrower for the use of assets and its money that can be expressed as a percentage of principal. Interest is the cost of borrowing money.

Finance is the backbone or blood of any economy or country that keeps its conduct smooth, healthy for many reasons anyone can lend money. Anyone can lend money and charge interest, but it is usually the banks and financial market doing the activity of charging the interest rates.

They pay interest rates to encourage people to make deposits along with this the lender earns profit the interest should be paid at least each month if not paid, the outstanding debt balance will increase even when you are making payment.

Although interest rates are very competitive, they never remain the same bank will charge higher interest rates if it thinks that there is a higher credit risk in other words the debt will not get repaid. For this reason, bank will always charge a higher interest rate. Bank also charges higher rate of interest to the people they consider risky in return of principal.

Bank charges two types of interest rate i.e. Fixed rate or variable rate it depends on whether the loan is a mortgage, credit card or it is a unpaid bill. The actual interest rates are determined by the stipulated time period i.e. long or short.

Fixed rate always remain the same throughout the life of the loan. But the initial payment of such loans consist mostly of interest payments but as the time passes you have to pay a higher and higher percentage of the debt principal.

Variable rate is a changing rate and does not remains the same throughout the year. Some of the banks who has highest interest rate are IDFC Bank 8%, RBL Bank 7.7%, Indusind Bank 7.5%, and Lakshmi Vilas Bank 7.5%.

Interest rate regulated by the Reserve Bank of India are listed here as follows: Bank rate, repo rate, reverse repo rate, Marginal standing facility rate, Cash reserve ratio, statutory liquidity ratio, base rate, Marginal cost of funds based lending rate, Saving deposit rate, Term deposit rate and call rate. The reserve bank of India is the central body controls the monetary base of Indian currency.

The RBI has recently reduced policy rate by 35 basis points on 7 august 2019. Now the repo rate as on 7 august 2019 is 5.40.

Repo rate is also called repurchase rate. It is the rate at which the RBI lends funds to commercial banks and to other financial institutions within the country. No bank is self-sufficient and that’s why every financial body faces the ups and downs in terms of finance. This is the reason why central bank is approached.

The current repo rate as fixed by the RBI is 5.40%. The repo rate has been cut down by RBI fourth time this year.

Whenever Reserve Bank of India faces a financial crunch and crisis, they invite commercial banks and other financial institutions to deposit their excess funds into RBI treasury and offers them good interest rates. Similar in this way when banks have excess funds, they willingly transfer it to RBI considering as their money is safe and secure with them. Generally, Reverse Repo Rate is always lesser than Repo Rate. It is the rate at which commercial banks lends funds to RBI. The reverse repo was brought down to 5.50 in June 2019.

The Bank rate is the rate of interest that is charged by the Reserve Bank of India against loans offered to commercial banks. This rate is usually higher than the repo rate. But the difference is it directly affects the end user. The current bank rate is the same as

Marginal Standing Facility Rate that is 5.65%.

The reserve bank of India sets a rate that is to be minimum below which Banks in India are not supposed to be allowed to lend the public. This minimum rate is called base rate in Indian banking. It is the minimum rate of interest that banks permits to charge from their customer. The base rate fixed by the reserve bank of India is in the range of 8.95% to 9.40% p.a.

Saving deposit rate is also fixed by RBI. It is the rate earned by the account holder for the amount that they have maintained in their savings account. The current saving rate fixed by Reserve bank of India is 3.25% to 3.50%. The other is the term deposit rate, this is also fixed by Reserve Bank of India, Customers who deposit money into their account and agree to fix it till a particular date or within a defined set off time period are to be named as termed deposits.

The interest rate for these term deposits is ranged by Reserve Bank of India to be between 6.25% to 7.30% as on 7 august 2019. It can be concluded that Indian economy is the mixed economy not only in terms of power and decision making but it is also having a structure that varies one from financial body to another financial body and that’s why it is having extended range of interest rates and they are different at different levels.

Vikas is the founder of - an LIC life insurance agency based in Gurgaon. He has a experience of 16 years and is working with professionals, corporate and HNIs for their LIC services needs. Vikas is a MBA in marketing from Symbiosis, Pune and has a experience of 15 years working with companies at various levels. Vikas can be reached at 9891420503 and [email protected]

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