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✓ Home Loan from ₹2 Lakhs To ₹15 Cr ✓ Multiple Lending Partners ✓ Interest Rates Starting @ 7.70%

Current RBI Repo Rates 2022

The current REPO Rate is 4.40%, where it has been increased by 40 basis points by the Monetary Policy Committee in May 2022.

The latest repo rate, reverse repo rate and other types of important rates of the RBI are as follows:

Repo Rate

4.40%

Bank Rate

4.25%

Reverse Repo Rate

3.35%

Marginal Standing Facility Rate

4.25%

 

Impact of REPO Rate on Housing Loan Interest Rate

Repo Rate Meaning

Repo rate stands for ‘Repurchasing Option’ or ‘Repurchase Agreement’. It is the rate at which commercial banks borrow money from the country’s central bank. In India, the Reserve Bank of India (RBI) offers funds in exchange for securities. This process helps the apex bank regulate and control inflation. Read on to know more about the repo rate and its implications.

How Does Repo Rate Work

Banks borrow money from the Reserve Bank of India to maintain their liquidity. In return, they must pay interest to the bank. The payable interest rate is known as the repo rate. As part of the agreement, banks provide the RBI with securities such as Treasury Bills to back the loan. The agreement also carries a predetermined price to repurchase the securities. The repo rate fluctuates as per the policies of the RBI and prevalent market conditions.

What are the Components of a Repo Transaction

The repo transaction comprises important components that base the transaction between the RBI and banks:

  • Controlling Economic Inflation: The repo rate is controlled based on economic inflation. It ensures that the inflation limit is always maintained.

  • Short-Term Borrowing: The Reserve Bank of India offers liquid funds for a short period. At the end of the tenure, the banks buy the securities that are deposited at a given predetermined rate.

  • Security and Collateral: Banks can offer collateral to the RBI in the form of Treasury bills, bonds, gold, and more.

  • Maintaining a Cash Reserve: Banking institutions borrow the money to maintain a cash reserve at all times.

What is Reverse Repo Rate

Reverse repo rate is a mechanism employed by the RBI when there is excessive liquidity in the economy. RBI begins to borrow money from banks, who, in turn, receive interest payout for extending their holdings. This process is essentially aimed to restrict the borrowing power of businesses and industries. RBI also increases the reverse repo rate to control inflation. This leaves banks with lesser funds to offer to investors. The current reverse repo rate stands at 3.35%.

Difference Between Repo Rate and Reverse Repo Rate

Repo Rate

Reverse Repo Rate

Rate at which RBI lends money to banks.

Rate at which RBI borrows money from banks.

Higher rate than the reverse repo rate

Lower rate than the repo rate

Controls the rate of inflation in the economy

Ensures management of cash-flow

Sale of securities to the Central Bank by banks. The securities can be repurchased.

Involves transfer of money from banks to the Central Bank.

 

Difference Between Repo Rate and MCLR Rate

Repo Rate

MCLR Rate

Repo rate is the borrowing rate at which the Reserve Bank of India (RBI) lends money to registered Indian banks and financial institutions, who use it to either fund the bank’s daily operations and/or lend it further.

The MCLR rate (Marginal Cost of Lending Rate), on the other hand, is a reference rate published by the RBI that is used internally by the lending institutions to determine their own lending rate for loans.

 

How is the Repo Rate Linked to Home Loan

  • The repo rate-linked home loan was introduced by commercial banks upon the release of the RBI guideline of 2019. As part of this function, the rate of interest on floating home loans is directly linked with the repo rate. This rate is decided by the RBI.

  • As per RBI instructions, banks should allow borrowers to transfer their home loans to repo rate-lined home loans. This then subjects the home loan interest rate to the fluctuating repo rate. Let us say the RBI repo rate of 4.40% is cut down by 30 points, then the repo rate linked home loan interest rate too will be changed to be cut down by 30 points.

  • On the other hand, if the repo rate increases by a few points, the rate of interest on home loans too increases. Apart from the fluctuating repo rate, there are other factors that affect the interest rate on home loans. These include the loan-to-value, loan amount, margin charged by the banks and more.

Current Repo Rate Effect on Home Loan

  • At present, the repo rate stands at 4.40% and has been around these levels since January 2014. This low repo rate proves to be great for homebuyers seeking a house loan. The cost of credit is reduced when the rate of interest is lower.

  • It is, however, important to note that the final rate on a home loan includes the RBI repo rate and the margin charged by the lender. It is also impacted by the loan-to-value, loan amount, and borrower risk, among other things.

How Does Repo Rate Impact Home Loan Rates

  • RBI modifies the repo rate often to control liquidity in the economy. A change in the repo rate has an instant effect on the different sectors and industries. Similarly, when the repo rate is modified, it majorly impacts the real estate sector. This is because home loan rates are directly related to the RBI repo rate.

  • The rate of interest levied on home loans is determined by the external benchmark and not the financing company. Safe to say, the slightest change in the repo rate affects the home loan interest rate. As part of an RBI circular issued in 2019, home loans must be linked to the external benchmark following the Repo Rate-Linked Lending Rate (RLLR) model.

  • Thus, the slightest change in the repo rate affects the home loan borrowers. It directly impacts the interest rate that has to be paid on the home loan. Home loan rates linked to repo rate comprise the repo rate and base spread or margin. The base margin is a component of repo-linked home loans that borrowers pay above the repo rate. This rate is determined by the respective lender.

  • Lenders levy two types of spreads: i.e. base spread and additional spread. The spread is determined by the banks based on factors like the loan amount, risk of the borrower, and more. When there is a change in the repo rate, there will be a change in the house loan EMIs too. The EMI will change as per the reset date decided by the bank when offering the loan.

  • As per RBI guidelines, the maximum reset frequency for repo rate-linked home loans is three months.

How Does the RBI Calculate the Repo Rate

RBI determines its lending rate after examining the state of the economy and taking the state of inflation into account. If the rate of inflation is high, it means that the supply of money in the economy is higher than it should be. If such a situation arises, the central bank increases the repo rate. An increase in the repo rate dissuades the recognised lenders from borrowing money. If the lenders borrow less amount of money, it will reduce overall supply of money in the economy, which will cause a fall in the inflation rate. If the rate of inflation is lower than what the RBI considers healthy, the apex bank will reduce the repo rate to encourage banks to borrow more and increase the supply of money in the economy, which should cause the inflation rate to stabilise.

What is RBI Repo Rate Cut and Its Impact

  • The RBI’s Monetary Policy Committee (MPC) meets every three months to deliberate on the need for an increase or decrease in the repo and reverse repo rates.

  • A repo rate cut enables financial institutions to borrow money from the RBI at a lower rate of interest. In turn, retail borrowers reap benefits through the different banks as the interest rate reduces. It helps consumers avail credit at a lower cost.

  • There is greater liquidity of funds in the market, which, in turn, boosts economic growth. If no cuts or boosts are required, the RBI MPC tends to keep the repo and reverse repo rates unchanged.

How Does Repo Rate Affect the Economy

The repo rate is important to regulate the supply of money and the level of inflation within the country. The repo rate influences the cost of borrowing. When the repo rate is lower, the cost of borrowing is lower and vice-versa.

  • Control of Inflation: When inflation in the country is high, RBI strives to control the flow of money within the economy. This is done by increasing the repo rate. Businesses and industries find it difficult to borrow money, thus, investments and money supply in the market is controlled. The negative impact on the economy, in turn, aids in controlling inflation.

  • Pumping Market Liquidity: The repo rate is lowered when RBI recognises the need for liquidity within the market. Businesses and industries have better opportunities to borrow money owing to the wider offerings at a cheaper rate. There is an increased supply of funds in the market, which further boosts the growth of the economy.

What are CRR, MCLR, and SLR and Why Are They Important

  • CRR or Cash Reserve Ratio is the percentage of deposited money that the bank has to deposit with the RBI. If RBI cuts down CRR, it will mean banks will have more money to lend/invest. The current CRR is 4.40% p.a.

  • The current SLR is 18% p.a. Banks are required to invest a certain percentage of their deposits in specific financial securities like government securities. This investment, as opposed to the CRR, earns them an interest.

  • The marginal cost of funds-based lending rate (MCLR) is the minimum interest rate that a bank can lend at. The bank cannot charge any interest lower than this rate. The rate is determined internally by the bank depending on the period left for the repayment of a loan. The current MCLR fixed by the RBI stands between 8% and 8.40%.

FAQs on Repo Rate

✔️What effect does Repo rate have on the life of a common man?

To put it simply, if the Repo rate goes up, the banks normally increase the lending rate of their loans, which means that loans become more expensive for the common man. If the Repo rate decreases, on the other hand, loans become cheaper.

✔️What is the relationship between Inflation and the Repo rate?

If the inflation rate is higher than what it should be as per the RBI, the apex bank will increase the Repo rate in a bit to reduce the money supply in the economy as it helps with regulating the inflation rate. If the inflation rate is lower than what RBI deems healthy, the apex bank reduces the Repo rate as it helps with the stabilisation of the inflation rate.

✔️What is the Present Repo Rate 2022?

RBI increased the repo rate by 50 basis points in August 2022. The present repo rate is 5.40 per cent.

✔️What is the Current Reverse Repo Rate 2022?

The current reverse repo rate is 3.35 per cent.