The Reserve bank of India slashed the repo rate in May 2020 by 40 bps to help boost the country’s economic growth. Post adjustment, the current repo rate stands at 4% and is expected to increase the demand for financial products like housing loans.
The latest rate cut is expected to impact both new and existing customers of financial institutions, especially in terms of loan repayment. To further understand what a repo rate means and how a change in this rate impacts borrowers and the economy in general, one must find out more about this regulatory policy and its functioning.
What is a repo rate?
Typically, repo rate meaning can be defined as the rate at which the RBI extends loans to financial institutions. It is considered a potent tool used for inflation and liquidity crisis control in an economy, among others. Conversely, reverse repo rate signifies a rate of interest at which RBI borrows money from these financial institutions. Generally, the repo rate is set higher than the reverse repo rate and is charged on securities and bonds issued by the RBI, which are typically repurchased in future.
With this understanding of what is repo rate, also take a look at its impact on various economic factors.
Impact of current repo rate
The RBI increasing or cutting down its repo rate depends on prevailing economic factors like liquidity requirement. Notably, a change in the current repo rate influences all sectors in an economy. However, its impact witnessed is diverse among the existing sectors.
For instance, due to the recent repo rate cuts, financial products like home loans have witnessed a hike in demand. It is because, with a decrease in the repo rate, financial institutions are expected to lower the rate of interest they levy on housing loans and the likes. This, in turn, encourages more individuals to borrow these funds affordably to meet their monetary requirements successfully.
In addition, some financial institutions also extend pre-approved offers to customers which further make the process of securing a loan less cumbersome. Typically, borrowers can avail such offers on several financial products including home loans and loans against property. Check your pre-approved offer now by entering your name and contact number to experience a smooth loan availing experience.
First-time homebuyers can consider using a home loan EMI calculator to gain a better understanding of the impact of these lending rates and much more. In turn, it will also prove useful in managing finances better.
The economic impact of changes in repo rate
Further, the following pointers also emphasise the effect of a repo rate change on the economy and helps to better understand its role –
- Impact on inflation
Recent data suggests that in July 2020, retail inflation stood at a whopping 6.93%. As per experts, reducing cash flow in the economy is an effective way to stabilise the inflation level. RBI thus aims to achieve such control by increasing the repo rate so that both availing a loan and investing becomes costlier for individuals. In turn, it constricts the supply of money in the market, thus containing inflation.
- Impact on liquidity
To boost the economy and to increase cash flow, the RBI also lowers the repo rate, thus facilitating affordable borrowings and investments in the market. Housing loan borrowers can further make the most of the current repo rates by implementing effective strategies to decrease their RBI home loan interest burden.
For instance, borrowers can opt for a longer tenor and consider prepaying the advance to lower their repayment burden. Other than that, they may take necessary steps to improve their CIBIL score and leverage their clean repayment history to negotiate for a better rate of interest. Existing borrowers may also consider switching to another financial institution to benefit from a loan balance transfer.
So, the recent rate cuts can be explained as RBI’s attempt to increase cash supply and to boost economic growth in due course. Individuals must further find out the impact of current repo rates on different types of borrowings and investments to make informed financing decisions. In turn, it will also help them to lower their exposure to risk and will allow them to manage finances more conveniently.