You must have heard the term repo rate a lot in the past few months, even if you don’t keep up with financial news. The world economy has been going through a crisis due to the trade war between the USA and China. However, countries across the globe, including India, are being affected. The U.S. and China account for a fifth of India’s merchandise exports, and because the global exports have been falling since the past year, this crisis has left India’s overall trade balance in a deficit. Owing to India’s trade surplus with the USA, the USA has also imposed trade restrictions on India, slowing down its growth.
In this backdrop, the central bank has been cutting its repo rate by considerable margins again and again.
The central bank of India, the RBI(Reserve Bank of India) controls the flow of money according to the state of the economy through various measures. Whether it is inflation, deflation, recession, or any other economic situation, the RBI takes multiple measures to deal with it. One of the key instruments that it uses is the RBI repo rate. This rate affects the flow of money in the economy.
What is the repo rate?
The repo rate or repurchase rate is the rate of interest that the RBI charges when it lends money to other banks that in turn lend money to us. Banks have multiple sources of inflow of money- loans, deposits, borrowings, etc. They lend money to individuals and organisations on the strength of these sources. Now, for example, the repo rate is 5%, and a bank X takes a loan of Rs. 100 from the central bank. At the rate of 5%, it will pay an interest of Rs.5 to the central bank.
What is the current repo rate?
The current RBI repo rate is 5.15%. It is also calculated in basis points or bps. (1%=100 bps). The RBI has reduced the repo rate by 135 bps since January 2019, which is a very significant measure.
Why has the RBI slashed it to such an extent, then?
Amidst the global crisis, the economy hasn’t been in such a good shape. International agencies have made negative predictions about the GDP growth of the country. In this scenario, the RBI is trying to boost investment and production by increasing the flow of money in the economy. In order to do this, it cuts down the repo rate so that borrowing becomes easier for banks. When it becomes easier for banks, it also becomes easier for individuals and organisations to borrow money at a reduced interest rate. Increased financial power, thus, boosts investments and purchasing.
What is the connection between repo rate and loan premium?
You have already understood how borrowing becomes easier for us at a reduced interest rate. Basically, banks pass on the benefit of a reduced repo rate in the form of reduced loan interest rate. Lower loan interest rate means lower EMIs and lesser burden, making personal loans and home loans more viable for you. For flexible personal loans and personal loans, you can check out Bajaj Finserv Personal Loan and Bajaj Finserv Home Loan, available on Finserv MARKETS. These loans give you a period of 12-60 months and upto 300 months respectively for repayment.
Is it mandatory for banks to pass on the benefit to customers?
No, it is not exactly a mandate. They need not always pass on the benefit as RBI loans make up a very small portion of a bank’s finances. Till very recently, banks were mostly using MCLR to decide lending rates. Marginal Cost of Funds-Based Lending Rate is an internal benchmark set by banks. However, recently the RBI made it compulsory to link lending rates to either of 4 external benchmarks, namely, the 91-day T-bill yield; the 182-day T-bill yield; RBI repo rate; or any other benchmark market interest rate produced by the Financial Benchmarks India Pvt. Ltd. Most banks have opted to go for the RBI repo rate, and now is when the rate will genuinely start affecting your loan premium.
So, is it a good time to take a loan?
It is a great time to take a loan. With our GDP predictions not getting any better and the economy still struggling, the RBI is expected to continue its ‘accommodative stance’ and reduce the repo rate further, thus reducing your loan premium in effect. Hence, go ahead and buy the house you have had in your mind, take that expensive holiday. For easy home loans and personal loans, you can check out loans available on Finserv MARKETS. You can avail a Bajaj Finserv Personal Loan of upto Rs 25 lakhs with zero collateral. It also offers flexibility in repayment with a tenure spread over 12 to 60 months. With minimal paperwork involved, you can avail a loan for a variety of purposes like travel, wedding, house renovation, etc.
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