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What is the Effect of Repo Rate on Loan?
Posted on Thursday, March 28th, 2024 | By IndusInd Bank
The repo rate set by the Reserve Bank of India has a direct impact on bank loan interest rates, including the personal loan. The relationship of personal loan interest rate with the repo rate may not be immediate, as banks may take time to adjust rates.
A fall in personal loan interest rates can ease borrower’s budget burden and make credit affordable. It can also increase the demand for personal loans. On the other hand, a rise in personal loan interest rates makes credit costlier for borrowers, which can reduce purchasing power. Now, the main question that may arise is: ‘’How does the repo rate influence changes in personal loan interest rates?’’. To get an answer, it is important to first understand the meaning of repo rate.
What is the Repo Rate?
The repo rate is the specified rate of interest at which the RBI lends its money to all the commercial banks in India against their treasury bills. In other words, the repo rate is the specific rate at which any commercial bank borrows money from the Reserve Bank of India. The RBI provides liquidity to all commercial banks under the liquidity adjustment facility (LAF).
The RBI’s Monetary Policy Committee (MPC) determines the repo rate after assessing various factors and key economic indicators. MPC consists of six members, including the RBI governor, and reviews the repo rate in bi-monthly meetings. Changes are made in the rate to achieve money policy objectives, such as controlling inflation. Raising the repo rate makes borrowing expensive for banks which in turn reduces the money supply. It also encourages savings that help curb inflation.
The present repo rate is 6.50% (as of Mar’24). The RBI last changed the rate on 8 February 2023, raising it by 25 basis points from 6.25%.
What is the Reverse Repo Rate?
The reverse repo rate is the opposite of the repo rate. It is the specific rate at which the Reserve Bank of India borrows or absorbs liquidity from any commercial bank against the collateral of government securities. The reverse repo rate also plays a crucial role in RBI’s monetary policy measures. At present, the reverse repo rate is 3.35%.
How Does the Repo Rate Impact the Loan Interest Rates?
Changes in repo rates affect loan interest rates, including personal loans. When RBI raises the repo rate, borrowing becomes expensive for commercial banks who in turn raise the interest rates for their customers. That means you, as a borrower, will end up paying more interest on your personal loans, which can burden your budget.
On the other hand, the repo rate cut by the Reserve Bank of India makes borrowing cheaper for commercial banks. They may then pass on the benefit to their customers by reducing the interest rate of personal loans and other loans. This will reduce the interest burden and help you pay back the loan without much stress. That means the change in repo rate has a direct bearing on the interest rate for personal loans.
Also Read: 5 important personal loan factors you should consider
One of the advantages of a cut in repo rate by the Reserve Bank of India is that it can make borrowing cheaper for the common public.
Also, new age banks like IndusInd Bank offer personal loan online at a competitive rate without any hassles.
Also Read: Who is eligible to apply for a personal loan?
Conclusion
In conclusion, RBI’s monetary policy measures, changes in repo rate, and reverse repo rate do have an impact on the bank loan interest rates. Having a clear understanding of repo rates and reverse repo rates and knowing the impact on retail loan rates can help potential borrowers make an informed decision.
Disclaimer: The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. Hence, you are advised to consult your financial advisor before making any financial decision. IndusInd Bank Limited (IBL) does not influence the views of the author in any way. IBL and the author shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information.
