The RBI Repo rate is the rate at which commercial banks borrow money by selling their securities to our country's central bank, the Reserve Bank of India (RBI), in order to maintain liquidity in the event of a fund shortage or due to statutory measures.
It is one of the RBI's primary tools for keeping inflation under control.
The RBI maintains the Repo rate and the Reverse Repo rate in response to changing macroeconomic factors. When the RBI changes interest rates, it affects all sectors of the economy, albeit in different ways.
Some segments benefit from the rate increase, while others may suffer losses. As on February 8, 2023, the RBI increased the Repo rate by 25 basis points, to 6.50 percent. The Reverse Repo has stayed unchanged at 3.35%.
Changes in Repo rates can have a direct impact on large-ticket loans such as home loans. The increase in the Repo rates is intended to discourage people from taking loans and to control the flow of money in the economy.
An increase in the repo rate will mean that banks will also increase their lending rates. This would be disadvantageous for especially big ticket loans. Consumers will borrow less from banks, make lesser purchases, leading to a fall in liquidity which will bring the inflation numbers down.
The Repo rate is a powerful tool in Indian monetary policy, with the ability to control the country's money supply, inflation levels, and liquidity. Furthermore, Repo levels have a direct impact on the cost of borrowing for banks.
The greater the Repo rate, the greater the cost of borrowing for banks, and vice versa.
During periods of high inflation, the RBI makes concerted efforts to reduce the flow of money in the economy. One way to accomplish this is to increase the Repo rate.
Borrowing becomes more expensive for businesses and industries and as a result, slows down investment and money supply in the market. The end product is that it has a negative impact on economic growth, which aids in the control of inflation.
When the RBI needs to inject funds into the system, it lowers the Repo rate. As a result, borrowing money for various investment purposes becomes less expensive for businesses and industries.
It also expands the economy's overall money supply. This, in turn, boosts the economy's growth rate.
According to the Monetary Policy Committee, inflation is going to be average, around 5.6%, in Jan-March, Financial Year 2023. Since May last year, the RBI has increased lending rates to contain inflation.
Global growth is expected to decelerate in 2023. High frequency indicators suggest that the domestic economy has remained strong in the 3rd and 4th Quarter of the Financial year 2022-23.
The MPC, currently chaired by Shri Shaktikanta Das, believes that such calibrated policy will keep inflation expectations in control It will also support medium-term prospects of growth. It was also decided that the MPC would focus on withdrawing accommodation so that the inflation stays within target, all the while supporting growth.
The RBI controls the repo rates and reverse repo rates to keep the inflation in check. These changes affect businesses and the common public as their spending and loan taking abilities depend on these policy rates. It is important to stay updated with the current rates.
The Monetary Policy Committee is supposed to meet at least once every quarter, or four times in a year. They update decisions after each such meeting.
If you are planning any big purchases in the near future and need to apply for a loan for it, the repo rate will affect your interest rates.
As the repo rate has increased, loans will become dearer. You might want to hold off on your plans of making any big purchases like property or vehicle, etc.
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