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RBI Repo Rate: The One Rate to Rule Them All

By Finserv MARKETS - Nov 28,2019
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RBI repo rate: the one rate to rule them all

The term ‘repo rate’ frequently crops up on news channels and papers, and often seems to describe the economic environment of the country. It is essential to know the repo rate and understand its implications because the reigning repo rate will determine the rate of interest even for the best personal loans or the best home loans you take.

The repo rate is known as the benchmark interest rate because it is the rate at which the Reserve Bank of India (RBI) lends capital to banks for their own short-term operational purposes. The higher the repo rate, the more expensive it is to borrow from the RBI. If RBI wants to make it easier for banks to borrow capital, it simply lowers the repo rate.

This equation further percolates down to those seeking to borrow from banks. If the repo rate is high, availing the best personal loans or the best home loans can also become quite expensive. However, if you apply for personal loans online on Finserv MARKETS, you can choose to avail upto Rs. 25 lakhs and repay it over a flexible repayment tenure ranging from 12 to 60 months. During the initial period of the loan amount, you can also choose to pay only the interest amount as EMI.

Another metric that forms part of the dialogue is known as the reverse repo rate. This is the rate at which the RBI borrows capital from banks for the short-term. During times when the reverse repo rate is high, banks will prefer to lend to the RBI rather than to regular people or businesses. The RBI hikes the reverse repo rate when it feels there is too much capital in the market and that liquidity must be reduced. The rate of interest of the reverse repo rate is always lower than the repo rate.

Repo and reverse repo rates are the most effective tools available with the RBI for ensuring price stability and boosting economic development. These are the monetary measures that are adopted when the RBI needs to control either liquidity in the market or deal with a deficiency of funds. The repo and reverse repo rates directly impact the lending rates offered by banks. Thus, the interest rate on the best home loans and the best personal loans can directly increase if the repo rate is increased by the RBI. However, if you apply for personal loans online on Finserv MARKETS, you can avail up to Rs. 25 lakh and choose a repayment tenure according to your convenience. You can also read about RBI guidelines for Home Loans.

Read on to learn about the significance of repo and reverse repo rates in the economy.

  1. In India, commercial banks can receive aid from the RBI for meeting their immediate requirements, in the case of both excess liquidity and a lack of funds. This liquidity framework, designed by the RBI, is aimed at avoiding any unexpected liquidity crises in the Indian banking system and is achieved by implementing the repo agreements.
  1. The RBI also has a responsibility towards preventing inflation in India. Excess liquidity in the economic system usually results in inflation, which can be prevented by the RBI increasing the reverse repo rate.

RBI repo rate: the one rate to rule them all

The RBI has to remain constantly vigilant and either hike the repo and reverse repo rates, or cut them when the situation calls for it. Read on to learn about how increases or cuts in the repo and reverse repo rates affect the economy.

  • Increase in Repo Rate:

By increasing the repo rate, the RBI is able to increase the rate at which commercial banks borrow from it. This, in turn, increases the rate at which commercial banks lend to their own customers. Due to this, fewer people and companies approach banks for loans and thereby the disbursal of capital within the economy gets limited.

  • Increase in Reverse Repo Rate:

By increasing the reverse repo rate, the RBI makes it more profitable for banks to deposit their excess funds with the RBI rather than disbursing them as loans to customers. In this way, the RBI is able to ensure that there is no excess liquidity in the market which can lead to an inflationary situation.

  • Cut in the Repo Rate:

By cutting the repo rate, the RBI makes it cheaper for banks to borrow funds from it and also disburse loans to their customers. In this way, the RBI is able to increase the flow of funds in the economy and thereby, promote economic growth. This is the best time to apply for the best personal loans or best home loans, since the interest rates will be lower. Apply for personal loans online on Finserv MARKETS, and avail up to Rs. 25 lakhs with zero collateral. You also get value added benefits like quick disbursals, flexible repayment tenures and zero collateral and minimal documentation needed.

  • Cut in the Reverse Repo Rate:

When the RBI cuts the reverse repo rate, it makes it less attractive for commercial banks to store their excess capital with RBI. As a result, banks use this excess capital to invest in other, more profitable avenues, including as loans for customers. This results in a liquidity increase in the economy as a whole.

The repo rate is decided by the RBI in view of the reigning market conditions, and it goes a long way in deciding the state of the economy as well.

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