Mon. Dec 5th, 2022
What Is The Current Repo Rate, And How Does It Affect Interest Rates?, Latest News Adda

Repo rate is one of the two policy rates that India’s apex bank uses to control inflation in this country. It indicates an interest rate at which the Reserve Bank of India lends funds to financial institutions against government securities.

Moreover, alteration in repo rates impacts the money supply in India’s economy, which translates into changes in the interest rate on loans and deposits. Resultantly, prospective home loan applicants must be aware of the current repo rate and its effect on the interest rates of this credit product to understand how they are impacted through this.

What is the current repo rate in India?

As of 8th April 2022, the current repo rate in India remained unchanged at 4% consecutively for the 11th time. RBI has kept this repo rate unchanged to maintain its accommodative stance and encourage economic recovery and growth.

How do repo rates impact a loan’s interest rate?

Knowing the meaning of repo rate is not sufficient, and individuals must learn how it affects the interest rate of credits like home loans. 

When the Reserve Bank of India charges a higher repo rate, a financial institution repays loans to RBI at an increased interest rate. To compensate for this monetary loss caused due to higher interest outgo, a financial institution increases interest rates on loans sanctioned to borrowers. This increases borrowing costs for individuals.

This current repo rate will relieve aspiring home loan borrowers from the significant burden of this financial product. Since a lower repo rate will reduce the applicable interest rate, the borrowing cost will remain affordable.

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However, individuals must note that the final rate on a housing loan depends on a margin levied by a lender. Additionally, factors like loan amount, financial profile, etc., determine the interest rate on a home loan in India.

Besides, a home loan is a long-term financial commitment. Thus, planning repayment in advance will help applicants manage their monthly budget efficiently. In this regard, borrowers can use a home loan calculator extended by leading financial institutions. This online tool gives results on monthly instalments payable towards a home loan after entering the tenor, interest rate and loan amount. 

These financial institutions also provide pre-approved offers to existing borrowers on a home loan, loan against property etc. These offers further expedite the application process, thereby saving time. Individuals can check their pre-approved offers by submitting their names and contact numbers. 

Apart from considering the repo rate and its impact on a home loan interest rate, potential borrowers must review home loan tax benefits available under specific sections of ITA to reduce overall tax liability. 

How do repo rates impact an economy?

When the Reserve Bank of India increases the repo rate, financial institutions refrain from borrowing credits to avoid paying a high-interest rate. As a result, financial institutions minimise granting loans to borrowers to save their cash reserves. This restricts the money supply in the economy and controls subsequent inflation rates. 

When RBI lowers the repo rate, it allows financial institutions to borrow and invest funds in the economy. This boosts cash flow, facilitates faster business activities and contributes to an economic boom. 

What are the essential factors for executing repo transactions?

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The Reserve Bank of India execute repo transactions with financial institutions depending on the following factors:

 

  • Leveraging and hedging 

 

The Reserve Bank of India purchases securities and bonds from financial institutions. In exchange for these collateral deposited, it lends them cash. 

 

  • Short-term borrowing 

 

The RBI lends money to financial institutions for a short span. After that, financial institutions buy back their deposited collaterals at a fixed price.

 

  • Collaterals and securities 

 

Financial institutions need to deposit collateral such as gold, bonds etc., to borrow funds from the RBI.

 

  • Cash reserve 

 

Financial institutions borrow funds from the Reserve Bank of India to maintain their cash reserve.

 

  • Control inflation 

 

The RBI increases or decreases the repo rate as per the economic situation to control subsequent inflation rates. 

A repo rate is an effective monetary mechanism that RBI uses to control the money supply in the economy. Moreover, knowing the current repo rate will help aspiring borrowers decide whether to borrow a big-ticket loan like a home loan, as a slight change in the repo rate affects the overall borrowing cost.

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