Exploring How the Impact of Repo Rate Changes Resonate in Your Day-to-day Life

By LODHA

From buying a house to managing life within a budget, a lot of financial matters are considered to be personal. While most of us are hesitant to talk about our salaries or spending habits in the company, your finances extend beyond your person. A lot of what happens in your bank account and wallet is affected by the goings-on in the country's economy. Open up a newspaper on any given day and you'll come across articles delineating how various financial forces are interacting and changing the way you live your life. While understanding such dynamics can seem challenging, all it takes is a little probing to get to the bottom of things. One of the more mystifying financial terms thrown around is repo rate. If you're not sure what is repo's meaning in banking, here's a complete breakdown that will help clear things up. 

What is Repo Rate's Meaning? 

To understand the repo rate's definition, it's vital to deconstruct the word itself. The word 'repo' is a shortened term referring to the phrase, 'repurchasing option'. Essentially, the repo rate refers to the rate at which most commercial banks borrow funds from India's apex financial institution, the Reserve Bank of India. Banks usually borrow money against security and bond collaterals. The RBI repurchases these assets at a later date, at a predetermined price. This process is where the rate gets its name from. So, the repo rate can be thought of as RBI's rate of interest. In a similar vein, when the RBI needs to borrow funds from commercial banks, it also must pay interest. The rate at which interest is charged in this instance is known as the reverse repo rate.  

How Does the RBI Repo Rate Work? 

The RBI sets up a monetary policy that helps regulate the cash flow within the economy. To that end, the RBI relies on various instruments, including the repo rate and reverse repo rate. So, during periods of high inflation, RBI increases repo rates and discourages businesses from borrowing. In turn, one of the repo rate increase effects is that it slows down activities related to investment and reduces the supply of funds in the market. Apart from inflation, the repo rates also increase when there is a chance that the country's currency might depreciate. On the other hand, repo rates are lowered during high recessions. This encourages borrowing and floods the market with cash flow. 

As far as the economy is concerned, the RBI monetary policy repo rate plays a crucial role in determining the volume of liquidity in the economy. If the repo rate is increased, it will cost lenders more. This effect will trickle down to regular borrowers. If the RBI wants to increase the cash flow in the economy, it will reduce the repo rate to encourage borrowing and expenditure of cash. So, the repo rate affects the economy in the following ways: 

- Combats Inflation: The repo rate is inversely related to inflation. If repo rates increase, the circulation of cash in the economy is limited and rising inflation can be controlled. 

- Promotes Liquidity: If the economy is strapped for cash, reducing repo rates helps encourage borrowing and investments. 

RBI's Guidelines on Repo Rates and How it Impacts Consumers 

On 8th February 2024, RBI announced concerning the repo rate. According to the announcement, the Monetary Policy Committee (MPC) has decided to keep the repo rate unchanged at 6.50%. Similarly, the reverse repo rate stands unchanged at 3.35%. 

Here's how this rise has impacted consumers like us: 

- Savings: If you've invested your surplus income in savings accounts or fixed deposits, you will enjoy higher rates and earn substantial returns due to the increase in the repo rate. 

- Borrowing: An increased repo rate limits borrowing power because the lending rates also increase, making borrowing an expensive affair. 

- Mortgage Rates: A hike in the repo rate impacts home loan terms and conditions. An uptick in the repo rate causes home loans with floating interest rates to become costlier. This is because banks may decide to pass on the effects of the increased rate to their customers. If you have taken a home loan, you might have to pay more EMIs. 

Since the repo rate remains unchanged as per the latest RBI announcement, you can apply for home loans without worrying about a further increase in interest rates and EMIs.