Repo rate in India is the rate at RBI offers loans to commercial banks using government bonds and treasury bills in the time of need. The interest rate at which the Reserve Bank of India gives loan to banks is known as repo rate. Repo rate is also known as Repurchase Rate.
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The current repo rate as decided by the RBI is at 4%, lowest since January 2014.
How does change in Repo Rate impact the financial performance?The repo rate is a primary tool in RBI’s hand to regulate cash flow in the economy. A cut in repo rate increases cash flow in the market and makes funds available for the general public. Similarly, by increasing the repo rate, the cash flow in the economy can be controlled and hence it puts a restriction on inflation
How Repo Rate impact home loan rates?The repo rates directly affect home loan rates as interest rates on home loans are not decided by the commercial banks. Prior to 2019, the banks and financial institutions linked home loans to Minimum Cost to Lending Ratio. Repo rates related to home loans, especially in case of floating home loan interest are subject to change.
Let us understand that with an example:
When RBI sets the repo rate at 4% from 4.35%, it cuts the repo rate by 35 points. The floating home loans which are linked to repo rate will then see a reduced interest rate on home loan by 35 points. Similarly if the repo rate increases, the floating rate of interest on home loan will increase.
Note: The fluctuation of interest rates depends on other factors as well. These factors are; loan value, risk factor of the borrower, and margin that is charged by banks to cover their costs.
I hope now you know what is the meaning of repo rate and how it impacts home loans.
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What is Repo Rate?
Dheeraj
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2021-04-22T15:46:01+00:00 2021-06-03T17:49:05+00:00Comment
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