Repo rate - Meaning, Impact and FAQs - Loan Trivia


Full-Width Version (true/false)

Monday 1 November 2021

Repo rate - Meaning, Impact and FAQs

According to a recent report, the RBI has decided to maintain an accommodative stance by keeping the repo rate unchanged at 4%. This decision would significantly affect the lending rates offered by financial institutions across the country.

Repo rate is a rate at which India’s apex bank lends funds to commercial financial institutions. During inflation, RBI raises the repo rate to reduce the money supply in the economy by discouraging financial institutions to borrow funds. Consequently, lending institutions raise their interest rates, thereby disincentivising individuals from borrowing funds and restricting cash flow in the economy.

Since repo rate affects the lending rates of credit form like home loan, potential borrowers must be aware of its functioning. Terms like repo rate and reverse repo rate must be understood thoroughly, owing to their implications in the lending market.

Here is a detailed discussion and answers to FAQs pertaining to repo rate meaning and related topics for individuals planning to avail a loan.

What is the repo rate?

Individuals availing an advance to purchase a house or property are obligated to pay interest against a set rate. Similarly, the Central bank allows financial institutions to borrow short-term credits against a fixed interest rate. This rate is widely known as a repurchase agreement or repurchasing option.

Hence, to borrow RBI funds, lending institutions are mandated to pledge security deposits like treasury bills. This is a crucial factor based on which lenders decide their interest rate on different financial products like a home loan and more.

What is the role of the repo rate in an economy?

Current repo rates play an important role in aiding the RBI to maintain a balance in the economy. Here are some factors that substantiate the need for repo rate in a country.

Manage inflation

Typically, RBI withdraws funds from the market during situations like inflation. This is the primary cause for increased repo rate, affecting credit borrowing costs. As lending institutions have to borrow credit from RBI at a higher rate, they raise the lending rate simultaneously. This restricts the money supply as there are fewer borrowers. Hence, the repo rate comes under the list of vital things you must know before taking a home loan.

Market  liquidity

Typically, the Reserve Bank of India lowers the repo rate to propel liquidity in the market. This is implemented to attract more borrowers by offering affordable interest rates. The result of lowered repo rates is increased investments and a boost in the economy. Thus, borrowers can benefit substantially from repo rate cuts.

How can potential borrowers benefit from repo-linked interest rates?

The Central Bank has mandated lending institutions to link their interest rates with external benchmarks like repo rate. This helps to promote transparency in the lending market. Moreover, the rate cuts play a vital role in handling recession. This is one of the reasons or factors that impact home loan interest rates.

To accelerate benefits, individuals should also compare different lending institutions. Doing this will allow them to opt for lenders offering substantial funds against affordable interest rates.

Few financial institutions also extend pre-approved offers that streamline loan processing and helps save time. Such offers are available on a range of financial products like loans against property, home loans, etc. Check your pre-approved loan offer simply by entering your name and contact number.

Thus, the repo rate plays a crucial role in regulating the Indian economy, affecting both lenders and borrowers. It is suggested to research well on reaping the benefit of rate cuts to ensure undertaking an informed financial decision.

No comments:

Post a Comment