repo rate

The Reserve Bank of India (RBI) is the country’s central bank and is responsible for regulating policies to ensure economic progress. To do this, it has at its disposal several monetary tools, such as the repo rate.The RBI Governor heads the Monetary Policy Committee (MPC), which collectively decides whether to make a change to the current repo rate or maintain status quo. The effect of a change in the repo rate trickles down to aspects such as home loan repayment. 

To know more about the repo rate, consider these 5 pointers. 

What is repo rate?

The repo rate is the policy rate at which the RBI lends money to the commercial banks of India when they choose to sell securities to maintain liquidity. In this repurchase agreement, the RBI and the bank involved agree to the repurchase of the securities on a given date and at a predetermined price. A repo rate is a tool used by the RBI to control key factors of the economy such as inflation, growth, and credit availability.

There are several other policy rates, such as the reverse repo rate, that are directly linked to the repo rate. 

What role does the repo rate have in the economy?

The RBI uses the repo rate to strategically control key factors of the economy. With it, the RBI has the power to regulate inflation, money supply, liquidity, and economic growth. 

If there is a high level of inflation, the RBI is likely to increase the repo rate to control the flow of money. An increase in the repo rate makes it costlier for banks to borrow funds, which in turn has a cascading effect on how much money supply there is in the economy. While this does curb the growth of the economy, it keeps inflation in check. 

On the other hand, the RBI also uses the repo rate to increase liquidity in the economy. When the repo rate is decreased, banks can borrow funds more easily. The net result is an increased supply of funds in the economy and this works towards economic growth. 

What is the current repo rate?

The current repo rate as of January 2021 is 4.00%. The current repo rate was decided upon by the RBI on 4 December 2020 and was left unchanged to maintain economic growth. The reverse repo rate is currently 3.35%.

What are the factors responsible for a repo rate cut?

The RBI adjusts the repo rate based on several macroeconomic factors. When it comes to a repo rate cut, the following could be the scenarios that merit such a change. 

  • If the RBI has inflation in control and is confident that there won’t be a demand-led surge in prices
  • If the RBI chooses to maintain an accommodative stance and is looking to boost economic growth
  • If the RBI wants to lower interest rates available to borrowers

How does the repo rate affect a home loan? 

When it comes to home loans, the interest rate is usually determined by a benchmark linked to the repo rate. As such, when the repo rate increases, the interest on your home loan should also increase. Lenders will quickly reflect this change and you’ll end up paying higher interest if you’ve opted for a floating-rate home loan. Similarly, when the repo rate drops, so should the interest rate on your home loan. Also, new home loans should be cheaper when the repo rate is low.

Taking note of these pointers will not only give you a better understanding of the repo rate meaning, but also offers insight into its importance. Armed with this information, you’re better equipped to understand the impact that monetary policy changes have on your personal finances. For instance, by monitoring the repo rate, you can identify the best time to opt for a big-ticket financial instrument like a home loan. At such a stage, be sure to compare lenders to get value for your money. To that end, an offering to consider is the Bajaj Housing Finance Limited Home Loan. 

Loaded with many features, this home loan is an instrument you can use to purchase the home of your dreams. You can get approved for a sanction of up to Rs.3.5 crore at a competitive interest rate. What’s more, you get to choose a flexible tenure that ranges up to 30 years and thereby handle repayment efficiently. This loan is easy to qualify for and requires minimal documentation. It also extends to you the unique property search services, which include expert counsel to assist with your home purchase undertakings. To reap these loan benefits at a time when the repo rate is low, apply online at the earliest.