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India’s Current Repo Rate and Its Effects on Home Loans

By IIFL Home Loans | Published On May 15 2023 5:50 AM 1 min read 142 views 997 Likes
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Loans have become a popular way of financing the monetary requirements of individuals from different walks of life. A loan is available for almost everything: education, travel, personal reasons, business, home, etc. The loan amount would provide finance for you, and the interest on the loan acts as an income for financial institutions.

With the increase in its popularity and demand, it is important to regulate the circulation of loans and money. The Reserve Bank of India (RBI) does this through the regulation of the repo rate. Before we move to the impacts of RBI repo rate on home loans, let us understand in detail what is RBI repo rate and how it differs from other RBI rates.

What is the Current Repo Rate?

'Repo' stands for 'Repurchase Option'. Repo rate is the rate of interest that the RBI charges on the money that it lends to commercial banks by 'repurchasing' the Government Securities (G-Secs) held by the banks.

RBI uses the repo rate as a tool to regulate the money flow and liquidity in the market.

The current repo rate in India as of May 2023 is 6.50%. The last change in this rate was in February 2023 when RBI raised the rate from 6.25% to 6.50%.

Difference Between Repo and Reverse Repo Rates

An important counterpart to the repo rate is the reverse repo rate (RRR). This is the rate of interest at which commercial banks deposit their money with the RBI. When banks have surplus funds, they park them with the RBI to earn interest on them.

In times when inflation is high, the RBI hikes this rate, so banks deposit more with the apex bank. This way, the RBI effectively limits the cash flow in the system to curb inflation. Banks are also supposed to maintain statutory reserves with the RBI at a specified ratio.

Repo Rate

Reverse Repo Rate

The rate at which the RBI lends money to banks

The rate at which the RBI borrows money from banks

The rate is higher than the reverse repo rate

The rate is lower than the repo rate

Commercial banks sell g-secs or government securities to the RBI

Banks buy g-secs from the RBI

Lowering the repo rate increases the money supply in the economy

Lowering the reverse repo rate also decreases the money supply in the economy

Effects of RBI repo rate on home loans

Now, the million-dollar question. How does an increased repo rate affect people? How would it affect you?

Simply put, when RBI increases the repo rate, banks have to pay a higher interest. And so, to be able to pay it, banks increase the interest rates on home loans.

A home loan is a very popular and long-term commitment. Because EMIs (Equated Monthly Installments) differ for each individual, so does the duration. Say you are repaying a home loan. The increase in the rate of interest would leave you with 2 options:

  1. To increase the EMI and let the tenure stay the same. But this increases the monthly expense, while income stays the same. So, it might not be affordable to most people.

  2. To increase the tenure at the same EMI amount. This means the loan will take longer to close, and the effective interest paid will also be higher.

A decrease in the repo rate, however, would mean that banks reduce their interest rate. At such a time, it could work as a great opportunity for you to apply for home loans.

Conclusion

RBI repo rate is the rate at which RBI lends money to commercial banks. The current repo rate in India is stable at 6.50% as of May 2023. RBI uses the repo rate to regulate money flow in the market. Reverse repo rate is the rate at which RBI borrows money from financial institutions. A rise in the repo rate causes a rise in the loan interest rates.

The influence of the RBI Repo Rate on home loans shouldn't stop you from living your dream. That is our firm belief. In any case, realising your dream of owning a home is more important to us here at IIFL Home Loans. We focus on bringing affordable housing to your easy access. Give a quick visit to our home loan page to get a complete idea of how you can own a home through our loan plans that fit every individual and their unique needs.

FAQs:

  1. 1. Does the repo rate affect the interest on my home loan?

Yes, it does. An increase in the repo rate might cause the interest on the home loan in your bank to go up.

  1. 2. Does the reverse repo rate affect my loan amount?

No, this rate does not directly affect the rate of interest.

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