Many individuals might have come across the term repo rate in banking but they might be unaware of the meaning and other details of a repo rate. The repo rate is basically an interest rate that is charged by the central bank of a country on the loans borrowed by commercial banks. The Reserve Bank of India is the apex banking institution that regulates the repo rate. Repo denotes a repurchase option or an agreement that is used as a tool in the financial market. On the other hand, if the commercial banks borrow a loan from RBI then they have to keep collateral with the RBI and then only they get a loan. So, you must see all the details that are related to Repo Rate.
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Repo Rate Working
If any commercial bank falls short of funds then it borrows it from RBI that is the lender of the last resort. But the RBI charges a certain rate of interest on that loan for a specified tenure and that rate of interest is known as the repo rate.
Collateral for Loan from RBI
The RBI also keeps collateral before giving loans to commercial banks. So, you must go through the collaterals a bank keeps when it borrows a loan from RBI:-
- Government Bonds
- Treasury Bills
- Equity
- Mortgage-Backed Securities
- Asset-Backed Securities
- Money Market Securities
- Gold
Prevailing Repo Rate
The current repo rate in India is 4% and it is the lowest since 2014. You must go through the repo rate in the last 8 years charged by the Reserve Bank of India.
| Dates | Repo Rate | Dates | Repo Rate |
|---|---|---|---|
| 28th January 2014 | 8% | 7th February 2019 | 6.25% |
| 15th January 2015 | 7.75% | 4th April 2019 | 6% |
| 4th March 2015 | 7.50% | 6th June 2019 | 5.75% |
| 2nd June 2015 | 7.25% | 7th August 2019 | 5.40% |
| 29th September 2015 | 6.75% | 10th October 2019 | 5.15% |
| 5th April 2016 | 6.50% | 5th December 2019 | 5.15% |
| 4th October 2016 | 6.25% | 6th February 2020 | 5.15% |
| 2nd August 2017 | 6% | 27th March 2020 | 4.40% |
| 6th June 2018 | 6.25% | 22nd May 2020 | 4% |
| 1st August 2018 | 6.50% | 6th August 2020 | 4% |
How Repo Rate Affect Home Loan Interest Rate?
You know that repo rate is the interest RBI charges on loans that it gives to the commercial banks. But if the RBI increases the repo rate then the commercial banks will have to pay a high rate of interest to RBI. As a result, the commercial banks increase the interest on home loans and recover it from the customers. Therefore, if the RBI increases the Repo Rate, the home loan interest rates will also increase.
Who Decides Repo Rate?
The Monetary Policy Council decides the Repo Rate and the Governor of the Reserve Bank of India heads this council.
Conclusion
We have told you the meaning and working of repo rate and now you have understood how it affects the interest rate of home loans. You must also go through the prevailing repo rate charged by the Reserve Bank of India to commercial banks. The rates on the deposits also get affected by the charge in the Repo Rate. So, you must know all about Repo Rate before you borrow a home loan or have any kind of deposit with the bank.
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