Repo rate is the rate of interest at which financial institutions receives money from the RBI when they need it. According to current regulations, the repo rate stands at 4%, and the reverse repo rate stands at 3.35%. Additionally, it is essential to learn that the repo rate is used to control the market’s inflation by altering the monetary supply, which regulates the economy.
What is repo rate, and how does it differ from reverse repo rate?
A repo rate is the interest rate that RBI levies on financial institutions to lend money to them. But, reverse repo rate is the rate of interest that RBI offers to financial institutions to deposit cash in its treasury. Additionally, a repo rate helps control the inflation within the Indian market, whereas a reverse repo rate helps control the money supply within the market.
How does a repo rate work?
As stated earlier, repo rate is used to control inflation within the market. Thus, when RBI increases this rate during inflation to cease the monetary flow, it neutralises inflation. Similarly, RBI decreases the repo rate during a recession to increase money supply within the market. So, RBI decides the repo rate depending on India’s economic condition.
Steps of a repo rate transaction
The steps of a transaction between RBI and the financial institutions are –
Step 1: Financial institutions provide details of eligible securities to the RBI
Step 2: RBI sanctions overnight or one day loan to that financial institution
Step 3: Then, RBI charges the repo rate on that credit
Step 4: Lastly, institutions repay the loan with interest to take their securities from RBI
Importance of repo rate
The detailed significance of repo rate is provided in the pointers given below –
- Repo rate assist financial institutions in maintaining their CRR and SLR ratios. A financial institution that requires cash to maintain their CRR goes on repo rate; in contrast, institutions that need government securities to maintain SLR go on reverse repo rate.
- Repo rate comes with a repurchase agreement. Hence, that transaction has shallow risk, which helps to maintain the security’s liquidity as the borrowing institution is willing to repurchase it. However, if it doesn’t happen, the securities can be traded easily.
- Finally, this rate act as a liquidity management tool and maintains the benchmark for the economy. According to the scenario of the economic conditions, RBI increases or decreases this rate to stabilise the economy of India.
Effect of repo rate on home loan
With the increasing repo rate, every financial institution has to spend more money on interest to avail of funds from RBI. Hence, the interest rate on big-ticket loans such as home loans gets relatively costly.
But, if this current scenario is concerned, repo rate stands at 4%, which is an all-time low; hence, loans have become cheaper. Thus, individuals seeking a home loan in India can get it at an affordable interest rate, making the overall cost much more frugal.
Apart from this rate, a prospective borrower’s current home loan interest rate might depend on several factors. This includes the property’s location, CIBIL score, job profile, tenor of a home loan, etc. Hence, before opting for one, learn about these pointers to settle for an affordable home loan option.
Also, most lenders advise using a home loan calculator before opting for a home loan. This will provide a comprehensive idea about financial liabilities beforehand. Although a simple tool to use, steps to operate it are provided below.
Steps to use home loan EMI calculator
The steps for operating this online device are –
Step 1: Visit the official website of your home loan lender
Step 2: Navigate to the EMI calculator section and put in all necessary details
Step 3: Finally, this calculator will provide details about your financial liability, including the EMIs
Besides affordable interest rates, leading financiers are extending pre-approved offers to expedite a home loan application process. These offers are available on selected secured and unsecured financial products. Applicant can enter their name and contact number to check their pre-approved offers.
Thus, before opting for a home loan, know every financial detail, including the repo rate, to find a suitable loan deal. Also, being aware of this rate helps one to time his/her loan application perfectly to get the best possible interest rates.