What is Repo Rate?
The repo rate is the interest rate at which the nation's central bank loans money to recognized banks or financial institutions in order to accomplish certain economic budgetary goals. The repurchase option or agreement is referred to as a "REPO." As a financial market tool, it promotes borrowing by using the specific debt instruments in the economy as collateral. Treasury Bills, Government Bonds form a part of it.
The Reserve Bank of India (RBI) lends financial support to commercial financial institutions at this rate, this is subject to change as per the running policy. All leading lenders and financial institutions in India can approach RBI whenever there is a fund shortage and then borrow funds for a definite tenor against a deposit of government bonds which is treated as collateral.
Repo Rate also serves as a prominent tool to keep inflation in control & also fulfills other monetary requirements, As borrowers from RBI these financial institutions pay interest to RBI as per the current and updated repo rate at the tenor’s end and they can repurchase the bond.
The changes in Repo Rate occur from time to time and this has an impact on the Home loan interest rate, bank deposit rates, and so on
The Monetary Policy Council - MPC is the regulated body that takes the necessary decisions on Repo Rate, this panel is headed by the Governor of RBI
As a Homebuyer its important to keep track of the changes in the Repo Rate, this helps in making informed decisions while applying for a home loan.
Current Repo Rate as on September 2022 is 5.90%
What happens when the Repo Rates are cut?
A decrease in liquidity in the money market has a direct impact that increases the flow of money, finances are available more easily for the general public, the commercial financial institution can approach RBI to avail loans at cheaper rates, this leads to the benefit of the consumer who can now enjoy a lower interest rate. The below list has the impact of the repo cut.
Consumers can now avail of loans at a lower interest rate.
Improves liquidity of funds, and higher ticket size of loans
Will contribute to economic growth
Impact On Home Loan
When the RBI lowers the repo rate, the cost of borrowing for banks goes down. Banks are expected to pass on this benefit to consumers eventually. Amid consumer demand bottoming out due to the Coronavirus outbreak and its adverse impact on the economy. the banking regular has brought the repo rate down to 4%, by implementing a 200-basis-point reduction over the past 12 months. On their part, banks have also started lowering home loan interest rates, to support consumers. The country's largest bank, State Bank of India, for instance. recently reduced its repo rate-linked home loan interest to a record low of 6.95%.
When RBI decreases the Repo Rate, the bank’s borrowing cost goes down significantly and the financial institutions are expected to pass on this benefit to the end customer, as the demand for home loans was affected by the pandemic. In the past 12 months, RBI has decreased the repo rate by 4%, and banks have also started lowering home loan interest rates, to support consumers. The largest financial institution in India has reduced the repo rate linked to home load by a record low of 6.95%.
Summary: As a Homebuyer its important to keep track of the changes in the Repo Rate, this helps in making informed decisions while applying for a home loan.
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