Financial Indicators: Understanding the Repo Rate Today

The government of India has entrusted the Reserve Bank of India, the central bank of the country, with the responsibility of maintaining economic growth. The RBI fulfils this responsibility with the help of different monetary policy tools. One such monetary policy tool is the Repo Rate. The Repo Rate is the rate of interest that the Reserve Bank of India charges banks and commercial lenders when they borrow money from it by pledging securities as collateral. The borrowing party enters into an agreement with the RBI as per which it must repurchase the pledged securities before a pre-agreed due date. This agreement is called the Repurchase Agreement and thus, the interest rate that the RBI charges on such borrowings is called the Repo Rate. If the borrowing party fails to repurchase the pledged securities before the date mentioned in the agreement, the Reserve Bank of India can sell the pledged securities for the recovery of the loan money. 

The RBI changes the Repo Rate as per the economic scenario. For instance, after the Covid-19 pandemic left the Indian economy several crippled, the Reserve Bank of India slashed the Repo Rate to 4%. This reduced Repo Rate made it possible for banks and NBFCs to borrow money from the Reserve Bank of India at a 4% interest rate. The result was that banks and NBFCs could lend money to borrowers at a much lower rate of interest. Consequentially, after the COVID-19 pandemic, the demand for loans witnessed a significant surge. The demand for home loans also witnessed a major spike as people who had been planning a home purchase for a long finally took the plunge. This increased demand for loans increased the flow of money within the Indian economy and helped bring the Indian economy right back on track. 

The current Repo Rate is 6.50%. After the pandemic, the inflation within the economy has been increasing slowly and the RBI has also been slowly increasing the Repo Rate to bring inflation under control. An increased Repo Rate reduces the demand for loans by making loans expensive and thereby, reduces the flow of funds within the economy. People spend less as they have less to spend. This helps bring the prices of commodities under control and therefore, inflation under check. 

Home loan borrowers must follow any changes in the Repo Rate as all home loans are linked to an external benchmark these days and in the majority of cases, this benchmark is the Repo Rate. Thus, when the RBI increases the Repo Rate, home loans become expensive. Further, the EMIs of home loans availed at floating interest rates go up. On the other hand, when the Repo Rate goes down, home loans become cheaper and so do the EMIs of home loans availed at floating interest rates.

It is for these reasons that individuals who are already repaying a home loan and individuals who are planning to apply for a home loan or a loan of any other kind must understand the concept of Repo Rate and its effect on their EMIs and also keep a tab on changes in the Repo Rate. The RBI publishes all changes in the Repo Rate on its website and thus, these changes are easy to track as well.