Current Repo Rate

Repo rate is the rate at which the RBI lends money to licensed commercial banks to maintain liquidity and to fulfil business requirements. RBI repo rate is the most important policy interest rate in India. The repo rate is decided by the Monetary Policy Committee headed by the RBI Governor. The repo rate is used by the central bank of India that is the RBI to signal its monetary policy stance to the banks, businesses, government and people at large. RBI reviews the repo rate from time to time as part of the monetary policy review. Generally monetary policy fulfills two objectives – Keeping inflation under control and accelerating economic growth.

06th Aug 2021 – RBI keeps Repo Rate unchanged at 4.00%

In its third bi-monthly monetary policy for the financial year 2021-22, RBI has kept the repo rate unchanged to 4.00%. This has been done to limit the damage to the economy caused by the second wave of Covid-19. Repo rate is the rate at which the central bank infuses liquidity in the banking system. The reverse repo rate also stands unchanged at 3.35%.

The RBI repo rate is revised in case of the following scenarios:

• When the central bank wants to signal lower interest rates in the market.
• When RBI is reasonably confident that inflation and fiscal deficit are in control and a demand-led price surge is unlikely.
• When the economy is slowing down and the RBI wants to accelerate growth by signalling an accommodative monetary policy.
• When the external balance of payments situation of the country is seen to be stable by the banks.

• The cut in the repo rate helps the general public to get the credit at a lower cost and thus it increases the cash outflow. For example, the cost of the repo rate linked home loan will decrease after the repo rate cut.
• Further, the repo rate cut also helps the industries to get the business loan and mortgage loan at the reduced rates which eventually pave the way for economic development.

The RBI repo rate is increased in case of the following scenarios:

• When the central bank wants to signal higher interest rates in the market.
• When RBI sees overheating in the economy and perceives a risk that inflation may surge.
• When there may be a risk of asset bubbles being created due to excessive capital formation.
• When the RBI wants to reduce speculation in foreign exchange or sees a risk of a disorderly depreciation of Indian currency.

• As the new MCLR is linked to Repo Rate, any increase in repo rate will lead to increase in MCLR. This will lead to an increase in interest rate for borrowers who have taken floating rate home loans, personal loans and business loans.
• As the Repo Rate is increased, the demand for credit facilities (loan) will decrease, due to higher interest rates. This will help the RBI and government to control inflation.

The main differences between the Repo Rate and Bank Rate are mentioned below:

• Repo Rate is lower than the Bank Rate.
• Bank Rate is levied against loans offered by the RBI to banks. On the other hand, Repo Rate is levied for repurchasing the securities sold by the banks to the RBI.
• Repo rate involves securities, bonds, agreements and collateral, whereas there is no such thing involved in the Bank rate.
• The bank rate involves the long term financial requirements of banks. On the other hand, the repo rate focuses on short term financial needs.

When the RBI cuts the repo,the cost of funds of banks reduces. As a result, the banks are able to advance loans to their customers at a lower cost. Banks typically use the repo rate as a signal to determine their deposit rates, lending rates and base rates.

Borrowers to pay higher rates; depositors will earn more

MyLoanCare expects interest rates in India to increase by 25-75 bps during 2021, a reversal from the steep reduction in rates that has been witnessed in 2020. Even though the Monetary Policy announced on 06th Aug 2021 has kept the repo rates unchanged, the upward movement of interest rates should start to get visible over the next few months, due to multiple reasons.

Reasons that should result in an increase in rates are:

• Greater demand for credit from businesses with a V-shaped sharp economic recovery in the country, post COVID-19 crisis last year
• Gradual tapering of additional liquidity support by central banks globally in wake of Covid-19 pandemic and lockdown.The RBI has now brought the CRR to 4% as on 06th Aug 2021.
• Rising fiscal deficit means higher government borrowing and no reduction in small savings rates
• Release of Pent-up demand for credit from individuals as people restart spending on consumer durables and property that was put on hold last year
• Budget 2020-21 has announced several large investments in infrastructure sectors, which could mean a huge demand for credit and hence, higher interest rates
• Expected increase in inflation with high spending that should invariably push the interest rates up.

What does it mean for borrowers?

A rate increase of 25-75 bps is likely to result in an increase in EMI’s on home loans by ₹ 15 to ₹ 50 per lakh of the loan amount. The same holds true for all other categories of loan borrowers, be it a personal loan, auto loan, business loan or property loan. We believe that it is the right time for borrowers to take or book a loan at the current rates as rates are at an all-time low and may only move up from here within the next few months.

What does it mean for depositors?

Banks and NBFCs have so far been in a situation where they had surplus funds due to a high inflow of deposits and lower loan offtake. However, this might change soon as credit demand is picking up and CRR has been reset back to 4% from 3% earlier. Soon, Banks and NBFCs may start competing for deposits and this is likely to push up interest rates on retail deposits by 50-100 bps over the course of 2021.

*The views expressed here are subjective and solely based on MyLoanCare’s assessment of the current economic scenario. Readers are advised to apply their own discretion before making a decision to take a loan or open a deposit account.

Another important tool of Monetary policy is the reverse repo rate, that helps in controlling inflation. Reverse repo rate is the rate at which RBI provides interest to Banks for depositing funds. It is , thus, the rate at which the RBI borrows money from the banks, instead of lending money to them.

• An increase in the reverse repo rate reduces the cash flow in the financial market, and a cut in the reverse repo rate increase the cash flow in the market.
• A high reverse repo rate could help banks earn more interest, and thus will prompt them to keep as much money with the RBI as possible.
• When RBI reduces the reverse repo rate, banks tend to invest their money in other sources like lending loans in the market. This way, the cash flow increases.

• The head office of the Reserve Bank of India is located in Mumbai.
• Presently, there are four zonal offices of the Reserve Bank of India at Mumbai, Delhi, Kolkata, and Chennai.
• RBI also has nineteen regional offices. These offices are located in various cities such as Thiruvananthapuram, Kanpur, Patna, Nagpur, Lucknow, Mumbai, Kochi, Kolkata, Jammu, Chennai, Delhi, Guwahati, Bhubaneshwar, Bhopal, Hyderabad, Ahmedabad, Chandigarh, Jaipur and Bangalore.

✅What is the repo rate in India?

The rate of interest at which commercial banks borrow money from RBI against government securities is called the repo rate.RBI repo rate is used to regulate the rate of deposits and loans by the commercial banks.

✅How does the repo rate work?

RBI buys government securities from commercial banks at a discounted price. The rate at which it is discounted is the repo rate. After the agreed tenure, the respective commercial banks repurchase those government securities from RBI. In simple words, repo rate is the rate at which RBI lends funds to the banks, based on which banks lends funds to the general public. An increase in repo rate increases loan rates and vice versa.

✅What are the components of a repo transaction?

The components of a repo transaction between RBI and commercial banks are:

• The loan given by banks is for overnight or one day.
• Banks sell approved government securities that are above the SLR limit.
• The interest charged by RBI on the advanced loan is called the repo rate.
• The loans availed by banks are repaid after one day, and the securities submitted as collateral are repurchased.

✅How does repo rate affect the economy?

The change of repo rate is aimed to affect the flow of money in the economy. An increase in the repo rate decreases the flow of money in the economy, while a decrease in repo rate increases the flow of money in the economy.

✅What is the current repo rate?

The current repo rate in India is 4.00%, effective from 06th Aug 2021.

✅What is the difference between the repo rate and reverse repo rate?

Repo rate is the rate at which banks borrow money from RBI. Whereas, the reverse repo rate is the rate of interest at which RBI borrows money from commercial banks.

✅What is Bank Rate, Repo Rate, CRR, SLR?

Bank rate is the rate at which RBI offers loans and advances to domestic banks. Repo rate is the rate charged by RBI for repurchasing the government securities sold by domestic banks.Cash Reserve Ratio (CRR) is the ratio of cash mandated by RBI to be maintained by commercial banks against its total deposits.Statutory Liquidity Ratio (SLR) is the reserve required to be maintained by commercial banks in the form of liquid cash, gold reserves, and RBI approved securities before approving any credit to the customer.

✅What is the difference between MCLR and Repo Rate?

Repo Rate is the interest rate at which the commercial banks borrow money from the RBI by using government bonds as collateral to achieve their fiscal goals. MCLR rate is a base Rate below which a bank can not lend money to anyone. It replaced the base rate system to determine the lending rates for commercial banks.

✅How does Inflation and Repo Rate relate?

Inflation refers to the situation where the power of money decrease and the prices of goods increase. This mainly happens because people have more money and goods are limited. To control inflation in the economy RBI uses the monetary tool: Repo rate. If RBI increases the repo rate, then the people will be tempted to deposit the money with the banks and will be discouraged to take loans. Thus, it will reduce the money in the hands of people and eventually control inflation.

✅How does Repo Rate affect the life of common people?

Repo rate is the monetary tool to control the supply of money. An increase in repo rate will increase the cost of the loan, thereby loans linked to repo rate will be available at higher rates, and at a comparatively bigger EMI. When the repo rate decreases, loans become affordable. The Reserve Bank of India tries to fix the repo rate according to the prevailing conditions in the economy.