The Reserve Bank of India in its fifth bi-monthly policy of 2019-20 FY kept the repo rate unchanged at 5.15% after 5 rate cuts. This rate is one of the vital monetary policies of the RBI, which controls other credit policies implemented by the apex bank of the country.
Definition (What is Repo Rate)
Repo rate is the rate at which the RBI lends money to financial institutions of the country. Repo, which stands for ‘repurchasing option,’ is an agreement between the central bank and borrowing financial institutions where they provide securities like treasury bills to avail overnight funds. A repurchase agreement at a predetermined price is also put in place to buy back those securities.
In common words, Repo rates is the interest rate charged by RBI to financial Institution.
Is Repo Rate or Interest Rate Same?
Yes, Technically speaking- it’s a repo rate and we call it Interest rates commonly.
Purpose (What is the Need of Repo Rate)
The purpose of this rate control is to regulate the liquidity of the economy. In case of inflation, when the availability of money in an economy needs to be controlled; this rate goes up to make borrowing a costly affair for financial institutions and industries. As a result, it reduces the cash flow and subsequently controls inflation.
On the contrary, when funds need to be pumped into an economy, this rate goes down. It makes borrowing cheaper and increases liquidity in an economy. This increases the cash flow in an economy and makes borrowing easy.
Through this policy, the central bank indicates its upcoming monetary policy. This rate is reviewed at every monetary policy review.
India Interest Rate (2000-2020)
source: tradingeconomics.com
Reverse repo rate (How much it impacts to financial institutions?)
The reverse repo rate is precisely the opposite of the repo rate. It is an interest rate that RBI pays to the financial institutions for depositing their excess funds to the central bank. This rate also plays a crucial role in deciding money flow in an economy.
A high reverse repo rate means a chance for financial institutions to earn more money by depositing their surplus funds, and as a result, it decreases the cash flow. In the case of an opposite scenario where this rate is low, it increases cash flow. The current reverse repo rate is 4.90%.
Impact of repo rate
The Repo rate plays a significant role in India’s economy. When this rate low, it allows financial institutions to borrow money from the central bank at affordable interest rates, and as a result, they can sanction loans to customers at a reduced rate of interest. This in turn increases the flow of money and increases investments.
But, when this rate is high, financial institutions can’t borrow money from the RBI at a favorable interest rate. Subsequently, the interest rate on different loans and other financial products is increased leaving a shortage of funds in the market. So, borrowers must understand how this RBI repo rate cut can impact their home loans or other loan products.
Well, this rate cut has brought good news homebuyers. In this current situation, where this rate is low and MCLR and its effects are no more visible on home loans, it is an excellent opportunity for aspirant homebuyers as they can avail a home loan at affordable interest rates. HFCs like Bajaj Housing Finance Limited is offering home loans at such rates as well as with additional benefits like flexible tenor options, home loan amounts of up to Rs.3.5 crore, etc.
Also, this HFC provides pre-approved offers that make the loan application process simple and saves time for borrowers. You can take a look at your pre-approved offer by providing essential contact details like name and phone number.
Availing a home loan means a long term substantial financial burden. So, calculating the EMI and knowing how much home loan EMI you can afford before committing is always advisable. Now, that the repo rate is revised, it is an excellent chance for borrowers to apply for home loans.
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