Decoding Repo Rate: What It Means for Your Property Loan - Loan Trivia

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Tuesday, 19 March 2024

Decoding Repo Rate: What It Means for Your Property Loan



The Reserve Bank of India uses several monetary policy tools to keep inflation under check and ensure sustained economic growth within the country. The Repo Rate is one such monetary policy tool.

Repo Rate is the rate of interest that the Reserve Bank of India charges scheduled banks and commercial lenders when they borrow money from it for a short term by pledging government-approved securities, such as gold, cash and government-approved bonds, as collateral. In this case, the borrowing party and the RBI enter a Repurchase Agreement which states that the borrowing party will repurchase all the pledged collateral before a pre-agreed date and if it fails to do so, the Reserve Bank of India can sell the pledged collateral for the recovery of the loan money. It is thus that the, in this case, the interest rate that the RBI charges the borrowing party is called the Repo Rate. In general, banks and commercial lenders borrow money at the Repo Rate to handle short-term liquidity crunches. Sometimes, banks and lenders also borrow money to maintain cash reserve ratios, as mandated by the RBI. 

While we are on this topic, borrowers must also know the difference between the Repo Rate and Bank Rate. Bank Rate is the rate of interest that banks and commercial lenders pay the RBI for long-term borrowings. The Bank Rate is always lower than the Repo Rate. The current Repo Rate is 6.50% whereas the current Bank Rate is 5.15%. 

So, how do Repo Rate changes affect the property loans? Well, there is a direct connection between Repo Rates and property loan interest rates. When the Reserve Bank of India increases the Repo Rate, scheduled banks and commercial lenders have to pay a higher rate of interest to the Reserve Bank of India to borrow money. This, in turn, leads to banks and lenders charging a higher rate of interest from their customers. Thus, when the Repo rate increases, property loans become expensive. More importantly, individuals already repaying a property loan on floating interest rates find their loan EMIs going up. Property loan borrowers repaying their loans at fixed interest rates do not experience any change in their EMI. 

On the other hand, when the Reserve Bank of India slashes the Repo Rate, Repo Rate-linked property loans become cheaper. Further, since lenders have to pay a lower rate of interest to the RBI to borrow money, they are also able to sanction loans at lower property loan interest rates. 

Lenders reduce the Repo Rate when economic growth slows down and the RBI wants to inject funds into the economy. On the other hand, the RBI increases the Repo Rate when inflation continues to increase unabated for a long time.

In conclusion, changes in the Repo Rate directly impact property loan interest rates and therefore, individuals planning to apply for a property loan or individuals repaying a property loan must keep themselves informed about Repo Rate changes. One can find news related to Repo Rate changes on the RBI's website as well as in newspapers. 


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