The Reserve Bank of India has announced a hike in repo rate by 40 basis points on 4th May 2022. The decision was taken in a meeting of the Monetary Policy Committee (MPC) with the Central board.
After the announcement of RBI, the commercial banks, and Non-Banking Financial Companies (NBFCs) increase the rate of interest on home loans, personal loans and auto loans.
The applicants who are going to apply for loans should have to pay higher EMIs as the lenders charge a higher rate of interest for such loans.
And the existing borrowers who have taken a loan at a flexible rate of interest, have to pay higher EMIs after the announcement of RBI.
According to Shaktikanta Das, the Governor of RBI, the Central bank has been a part of the announcement that gradual withdrawal of easy money from circulation is noted in the previous month.
Moreover, the government has also seen the geo-political tension, uncertain raise in oil prices, and lack of commodities globally which has affected the Indian economy wisely. These are the crucial factors behind the repo rate hike.
The Reserve Bank of India has changed the key lending rate after two years. The rate was cut last time in May 2020, and it has been kept unchanged since then.
The Reserve Bank of India also increased the Cash Reserve Ratio (CRR) by 50 basis points to 4.5%.
It is defined as the rate at which the Reserve Bank of India lends money to the Commercial banks.
It stands for Repurchase Arrangement or Repurchasing Option (REPO). And also known as Repurchasing agreement.
Commercial banks avail money by selling securities to the Central Bank (RBI) to manage the liquidity in case bank face a shortage of funds.
Therefore, RBI uses the Repo rate to keep inflation rates under control.
|Marginal Standing Facility Rate||4.25%|
|Reverse Repo Rate||3.35%|
Listed below are the changes in the rate since 2005
|Effective Date||Repo Rate||Percentage Change|
|09 October 2020||4.00%||0.00%|
|06 August 2020||4.00%||0.00%|
|22 May 2020||4.00%||0.40%|
|27 March 2020||4.40%||0.75%|
|06 February 2020||5.15%||0.25%|
|07 August 2019||5.40%||0.35%|
|06 June 2019||5.75%||0.25%|
|04 April 2019||6.00%||0.25%|
|07 February 2019||6.25%||0.25%|
|01 August 2018||6.50%||0.25%|
|06 June 2018||6.25%||0.25%|
|02 August 2017||6.00%||0.25%|
|04 October 2016||6.25%||0.25%|
|05 April 2016||6.50%||0.25%|
|29 September 2015||6.75%||0.50%|
|02 June 2015||7.25%||0.25%|
|04 March 2015||7.50%||0.25%|
|15 January 2015||7.75%||0.25%|
|28 January 2014||8.00%||-0.25%|
|29 October 2013||7.75%||-0.25%|
|20 September 2013||7.50%||-0.25%|
|03 May 2013||7.25%||-0.50%|
|17 March 2011||6.75%||-0.25%|
|25 January 2011||6.50%||-0.25%|
|02 November 2010||6.25%||-0.25%|
|16 September 2010||6.00%||-0.25%|
|27 July 2010||5.75%||-0.25%|
|02 July 2010||5.50%||-0.25%|
|20 April 2010||5.25%||-0.25%|
|19 March 2010||5.00%||-0.25%|
|21 April 2009||4.75%||0.25%|
|05 March 2009||5.00%||0.50%|
|05 January 2009||5.50%||1.00%|
|08 December 2008||6.50%||1.00%|
|03 November 2008||7.50%||0.50%|
|20 October 2008||8.00%||1.00%|
|30 July 2008||9.00%||-0.50%|
|25 June 2008||8.50%||-0.50%|
|12 June 2008||8.00%||-0.25%|
|30 March 2007||7.75%||-0.25%|
|31 January 2007||7.50%||-0.25%|
|30 October 2006||7.25%||-0.25%|
|25 July 2006||7.00%||-0.50%|
|24 January 2006||6.50%||-0.25%|
|26 October 2005||6.25%||00.00|
Listed below are the parameters based on the RBI to execute the transaction with the lenders: -
The rate is utilized by the Central Bank of India to maintain the flow of money in the market. When the market is affected by inflation, RBI increases the rate which lets the borrowers to pay higher interest in such a situation.
It disappoints the lenders to fund borrower's requirement which reduces the supply of money in the market. Similarly, repurchasing agreements are reduced in case of a recession.
Based on the economic condition, the Reserve Bank of India regulates the repurchasing agreement.
The rates are chosen by the Central Bank of India based on the inflation in the market.
The Repurchasing agreement is a strong arm of the Indian monetary policy that can control the money supply, inflation levels, and liquidity of the country.
Also, the level of repurchasing agreement has a direct effect on the borrowing cost for banks. As high as the rate the higher will be the cost of borrowing for banks & vice versa.
When the level of inflation is high, the Reserve Bank of India makes an effort to bring down the flow of money in an economy.
It is only done by increasing the rate and makes the borrowing costly for industries and
businesses, which sequentially slows down the supply of money & investment in the market.
It has a negative impact on the growth of the economy that helps in controlling inflation.
When the Reserve Bank of India raises funds in the operation, it reduces the repurchasing agreement.
Therefore, industries and businesses find it low-priced to borrow money for several investment purposes.
It also raises the supply of money in the economy; hence it increases the growth rate & liquidity in the economy.
The reverse repo rate is the rate at which the Reserve Bank of India (RBI) borrows money from the Commercial bank.
It helps the RBI to get funds from the commercial bank when needed by providing them with an attractive interest rate. Currently the reverse rate is @3.35%.
|Parameters||Repo Rate||Reverse Repo Rate|
|Meaning||It is the rate where Reserve Bank of India lends money to the banks.||The Reserve rate is the rate where RBI borrows money from Banks.|
|Rate of Interest||More than the reverse rate||Less than repurchasing agreement|
|Mechanism of operation||RBI gives funds to commercial banks against collateral.||Commercial banks deposit excess funds with RBI and & get interest on the deposit.|
|Controls||Inflation||Cash flow in the economy|
|Purpose||To fulfill the deficiency of the funds.||Liquidity in the economy.|
|Applicant’s objective||To maintain a short-time deficiency of funds.||To reduce the overall supply of money.|
|Impact of higher rates||Loans become expensive as the cost of funds increases||Money supply increases as the commercial bank gives more surplus funds|
|Impact of lower rates||Loans become cheaper as the cost of funds decreases.||Supply of money increases|
|Charged on||It is charged on the repurchase agreement||It is charged on the reverse repurchase agreement.|
The relationship between the repurchasing agreement paid by the Reserve Bank of India & the interest rate paid by the applicant to the bank is directly proportional. As high as the repo rate, the higher will be the cost of borrowing.
The RBI constantly changes the repurchasing agreement & reverse repo rate according to the change in the factors of macroeconomics. When RBI changes the repurchasing agreement, it affects all the sectors of the economy in different ways.
Some sectors lose as a result of the rate hike whereas other sectors might gain with the increase in rate.
Listed below are examples to understand the relationship between them: -
As on October 2020, the rate was 4.00%. Assume that the RBI raises it to 6%. So, the cost of borrowing from the Reserve Bank of India has been increased by 200 basis points or 2% for the commercial banks.
To repay the high cost of borrowing, lenders will charge a higher rate of interest from the applicants. Therefore, the loan will be expensive for the residents.
If the RBI reduces the repurchasing agreement from 4% to 3.75%, then the lenders will be able to borrow loans easily.
Therefore, banks will lower the rate of interest for loans, and availing a loan from the bank will be cheaper for residents.
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1. What is the current Repo rate of RBI?
On 4 May 2022, the RBI increased the rate by 40 basis points. Hence, the current rate is 4.40%.
2. What is the impact of the hike in repo rate?
If the rate increases, the interest for the loan also increases since borrowing funds from RBI will be expensive for the commercial banks.
3. What happens if RBI increases the reverse repo rate?
If RBI increases the reverse repo rate, lenders need to charge high interest rates on the funds.
4. What happens if RBI reduces the repo rate?
If the Reserve Bank of India reduces the rate, then the individuals and businesses are able to get loans at lower interest rates from the banks.
5. Is repo rate affect personal loan?
Yes, it affects the rate of interest on all mortgages i.e., housing loans, car loans, personal loans, etc.
6. What is the objective of a repurchasing agreement?
The main objective of a repurchasing agreement is to lend money to the lenders.
7 . Among repo rate and reverse repo rate – which will be lower?
The reverse repo rate will be lower.
8.How does repo rate control inflation?
If the rate increases, it decreases inflation & if the rate decreases, then inflation will increase.
9. Why the interest rate of banks is higher than the repo rate?
Bank rates are higher than repo rates because lenders borrow funds from RBI and lend money to their applicants at a higher rate of interest for making profits & it controls liquidity.
10. How do repo rates affect home loans?
The repo rate first affects the rate of interest which in turn influences the interest rate on home loans.