Everything about Repo Rate: Meaning, the Effect on Inflation and Growth

The current repo rate stands at 5.15%, which had been recently slashed down from 5.75% by the RBI. It is expected that this decision is set to influence the overall economy positively and is all set to impact borrowers significantly.

Regardless, to understand its repercussions on credit facility and the economy in general, one must learn about the vital aspects of repo rate in details.

What is the repo rate?

In a general sense, it is the rate at which Indian commercial financial institutions borrow money from the RBI by selling their respective reserve of securities. Also, it is used as a potent tool to control inflation and cash circulation in the economy while restoring balance in the process.

It is to be noted that the reverse repo rate is conceptually different from the repo rate. To elaborate, the former is the rate at which RBI borrows money from commercial financial institutions in India. Nevertheless, it is also an instrument used to control the flow of money in the economy.

RBI either increases the repo rate or reduces it depending on the situation at hand. For instance, RBI has reduced the current repo rate as an attempt to encourage commercial lenders to borrow more at the existing rates. This, in turn, has a favourable impact on borrowers in general.

Effect on credit facilities

With the new repo rate cut, individuals are wondering what to expect from this announcement. It can be said that it will impact both lenders and borrowers significantly.

To elaborate, every time such rate is slashed down by RBI, the amount of interest paid by financial institutions is reduced as well. This not only encourages institutions to borrow more but also enables them to lower the interest rates they charge.

This chain of reductions tends to make loan options like a home loan more affordable for borrowers and further facilitates a smooth repayment process. In turn, it helps to meet their financial requirement and enables borrowers to repay their debt.

This being said, individuals who opt for financial institutions like Bajaj Housing Finance Limited to avail a housing credit would be the most benefited. For instance, such an institution tends to extend substantial loan value at an already attractive rate of interest.

They also provide pre-approved offers on several financial products. This further, simplifies the process of availing financial assistance and repaying it successfully. You can check your pre-approved offer by providing basic details like name and contact information.

Nonetheless, before applying for housing credit, individuals must calculate their home loan eligibility to be better equipped for it. Also, choosing a feasible financial institution that charges a competitive rate of interest and offers easy repayment option would prove beneficial.

Also, by calculating EMIs before taking a home loan, borrowers will be able to manage their repayment better.

Effect on inflation and liquidity

Besides controlling cash circulation in the economy, the repo rate also has a significant role in regulating inflation and liquidity.

• During inflation: As a means to combat inflation, RBI tends to decrease the flow of cash in the economy. To achieve it, the RBI uses transmission mechanism and increases its lending rates. This makes availing financial assistance expensive, and further stagnate the flow of investment and consumption. In turn, it helps bring down the overall market demand and will eventually help to contain inflation successfully. Hence, the impact of such rate on loan interest rates is also one of the things one must know before availing a loan.

• During deflation: Similarly, to boost the economy in general RBI tends to decrease the repo rate. It helps to increase the cash circulation and encourages individuals to invest more. Consequently, a boost in the investment market helps economic growth as well.

Lastly, it can be said that the repo rate is primarily a financial instrument that helps to regulate the cash flow, combats inflationary effect and boost the economy. Nevertheless, individuals must try to create financial provisions that help them make the most of changes in such rates.