Repo rate or repurchase rate is a key monetary policy rate of interest through which the Reserve Bank of India regulates money flow in the economy. It is the rate at which RBI lends money to various financial institutions in the country.
It is increased or decreased by the RBI in accordance with market conditions, liquidity, growth, credit supply, government’s monetary policies, and so on.
RBI repo rate affects the interest rates on loans to a great extent. Since repo rate is used by financiers themselves to borrow money from RBI, the rate at which they will again lend this money to customers will also vary.
Impact of repo rate on loans
Repurchase rate is one of the primary factors which directly impacts the interest rates of credits, including secured advances like home loan. It is calculated through basis points, where 100 basis point is equivalent to 1% repo rate.
Increase in the rate will contract the money supply in the economy as lenders will have to pay higher on their borrowings to the RBI. This results in less availability of funds with the lenders. Thus, the regular interest rates on loans will also go up.
RBI repo rate cut happens when there is insufficient flow of money in the economy. Interested borrowers must keep a close eye on RBI repo rate cuts and understand what is to be expected from them. Current RBI repo rate stands at 4%. The RBI repo cut has, thus, considerably brought down loan interest rates, making it easier to borrow.
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