Say you plan to buy your dream home, but you've got limited capital. Now where do you go for that extra money during such a lack of funds? Banks, of course. But have you ever thought about where banks go in case they need precautionary funds? Most of you may know this, it's the Reserve Bank of India (RBI) — India's central bank and regulatory body that is in charge of regulations of the Indian banking system. Next, we all know that banks offer us loans at a certain interest rate. Now what will happen if the RBI increases the interest rate at which banks borrow money from them? How will banks manage to pay an increased interest rate? By either offering higher returns on deposits or charging a higher interest rate on loans, and that’s exactly what’s going to happen after the RBI’s monetary policy of December 2022.
On December 7, 2022, the RBI raised the Repo Rate by 35 basis points, raising the rate to
6.25% and marking the fourth hike or Repo Rate increase in 2022.
Previously, the RBI raised the repo rate by 50 basis points to 5.9% effective September 30,
2022. The RBI has raised the repo rate four times in the current fiscal year.
If you’re wondering what a repo rate even means, let us help you there. Repo rate refers
to
the interest rate at which commercial banks borrow money from the RBI.
These banks sell their assets to the RBI in order to maintain their liquidity in events
caused
by a lack of funds or because of specific regulatory actions.
Simple, to control inflation. In India, inflation has recently been high. Since January,
retail
inflation in India has remained above 6%.
It was higher than 7% in April, May, June, and August, whereas the RBI's tolerance limit
is
between 2% and 6%.
Let’s understand how the RBI’s increased repo rate will control inflation. It’s
all
about
achieving a fall in demand.
As the repo rate has increased, commercial banks will raise interest rates on
Deposit accounts: This will encourage customers to keep their money in banks,
leading to
a fall in money in circulation/liquidity and demand. Such steady supply causes
prices to
fall.
Loans: This raises the cost of consumer loans. As a result, they prefer to get
fewer
loans.
Without loans, they are unable to make large purchases, decreasing liquidity and demand.
In addition to economic growth, RBI repo rate increase will also have a negative effect
on
loan takers.
Existing and new borrowers will see an increase in their EMIs as a result of rising
interest
rates, which will reduce the amount of excitement they feel about fulfilling their
dreams via
loans.
For instance, say that before the new RBI repo rate, Tata Capital was offering
you a
home
loan at an interest rate of 8.0%.
Now that the RBI has raised its target interest rate by 35 basis points, rates
will rise
by
0.35%.
This means that Tata Capital will now offer you a home loan at the new interest rate of
8.35%.
Moreover, not just home loans. Such an increase in the benchmark interest rate by RBI
will
affect all kinds of loans, including car loans, student loans, personal loans,
business
loans,
credit cards etc.
This will make it more expensive for them to borrow money from commercial banks.
Let’s face it. Some sectors of the economy will profit from the repo rate hike while others will suffer, including loan takers. While such guidelines are out of our hands, the least one can do as a loan taker is make a wise decision when it comes to choosing the right bank and interest rate. enables easy comparison of loans from multiple banks at once. Additionally, you can use tools such as eligibility and EMI calculators to make a wise decision and gain access to financial knowledge.
