Amazing Facts About Repo Rate You Wish You Knew Before

In May 2020, the RBI reduced the repo rate by a sharp 40 bps bringing it down to 4%. Financial products, especially housing loans, are closely knit with repo rate. As a result, even the slightest change in it impacts the other significantly.

What is the repo rate?

Fundamentally, repo or repurchase rate is the interest percentage at which financial institutions in India borrow funds from the RBI. It serves as a monetary tool that allows the regulatory body to control cash flow in economy and boost economic growth.

Impact of repo rate – In a nutshell

Usually, high repo limits cash flow and individuals’ capacity to borrow or invest money. So, repo is increased to control the rate of inflation. Conversely, it is reduced to increase the cash flow in economy. As individuals’ purchasing power increases, it helps to revive a stagnant economy.

Current repo rate and its impact

The interest accompanying financial products like deposit schemes and home loans tend to be influenced by a change in repo. One must note that interest rates of such financial products mimic the direction at which the repo moves.

For instance, recently, when RBI slashed the repurchase rate, it also encouraged financial institutions to lower housing loan interest rates. As a result, it encouraged individuals, especially first-time borrowers, to apply for this credit option.

Regardless, one must note that Repo Rate Linked Lending Rate (RLLR) loans react to the changes in repo faster than MCLR-linked loans. Both new and existing borrowers can use a housing loan calculator to understand how this change in repo rate impacts their loan burden.

Read Also: Here’s everything you need to know about the repo rate