Repo Rate

There have been a series of economic changes worldwide due to the ongoing war between Russia and Ukraine. The Weakening of the Indian currency and the enormous increase in the cost of living are examples. Inflation has reached its highest, 7.41 % in September from 7% in August, measured by the Consumer Price Index (CPI).

To battle against the strengthening dollar and to reduce the increasing pressure of inflation. At its September meeting, the Reserve Bank of India’s Monetary policy committee(MPC) again decided to raise the repo rate by 50 basis points, where one basis point(bp) equals 100 percentage points. 

Since May, there has been a continuous rise of 190 bp in the repo rate. Currently, the repo rate stands at 5.9%. With it, borrowers will see an increase in a rate hike and a tenor duration for their EMI and loan. Although MPC has not changed the reverse repo rate, which is currently at 3.35%, it has changed the marginal standing facility rate to 5.15%. 

What is the Repo Rate?

When you need cash, you go to the bank for money, but where does the bank get its money in a time of need? In India, RBI is responsible for providing cash to all commercial banks in their urgent need of cash.

The interest charged by RBI on the amount of money borrowed by the bank is called the repo rate. Where repo stands for repurchasing option decided in-between RBI and the bank, it is the fixed rate of interest at which RBI provides a loan against the collateral of government security like a treasury for a short duration from overnight to seven days.

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How Does Repo Rate Work?

RBI usually increases the repo rate to control inflation, making it harder for bank banks to borrow money, reducing the cash flow in the market that helps control inflation. Similarly, at times of recession, the RBI decreases the repo rate, which helps the banks take a loan at a lower interest, increasing the surplus of cash flow in the financial market. Therefore, it is an unnoticed but significant factor in determining which bank will provide the loan to consumers.

RBI Repo Rate 30 September 2022

  1. RBI repo rate is currently at 5.90%
  2. The bank rate is 5.15%
  3. The marginal standing facility rate is at 5.15
  4. The reverse repo rate remains unchanged at 5.35%

RBI Repo Rate Cut History 2022

DateRepo rate in percentage
30 September 20225.90%
5 August 20225.40%
8 June 20224.90%
4 May 20224.40%
06 Aug 20204.00%

How Does RBI calculate the repo rate:

The RBI determined the repo rate according to inflation, money flow in the market, and liquidity. It is an instrumental tool in controlling inflation in our country’s economy.

Difference Between Repo Rate and Reverse Repo Rate:

The reverse repo rate is the rate at which RBI borrows money from banks during excessive cash flow in the market. It is a significant tool used by RBI in controlling the amount of cash flowing in the market.

It is increased to attract the banks to save their money with RBI in exchange for higher returns. Thus it leads to higher lending charges imposed on investors.

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Some Keys differences between reverse repo rate and repo rate:

  • The repo rate is always more significant between the repo rate and reverse repo rate.
  • The reverse repo rate is used to control money flowing in the market, whereas the repo rate is used to control inflation.
  • In the repo rate, some security is required to deposit by banks, while in the reverse repo rate, there is only an exchange of money between both parties.

What is The difference between the repo rate and the MCLR rate?

Marginal Cost Fund-Based Lending Rate short MCLR is the internal rate or benchmark a financial institute sets to determine interest rates like minimum interest applied on the home loan. It was introduced in 2016 to replace the previous base rate system.

The repo rate is the fixed rate set by RBI at which it provides loans to commercial banks overnight in exchange for security deposited by banks.

The repo rate and its effect on common people:

The impact of change in the repo rate can be seen in many sectors. It can benefit some by rising, while some industries may suffer losses.

The most visible effect can be seen in a home loan. Nowadays, with an increasing alacrity repo rate, it will be difficult for consumers to borrow loans from banks. They will have to spend more on EMI instalments and longer loan tenors.

What is the relationship between inflation and repo rate?

As mentioned before, the difference between Inflation and the repo rate can be described as the repo rate being a tool to control inflation. For further explanation, suppose there is a large demand for an X item but a limited supply. 

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So what will the retailer do? They will increase the selling price of X item. Now imagine this scenario at the national level, where there is large demand but limited supply, which gives one of the reasons for inflation. 

To kill the demand, RBI continuously amends the repo rate to curb inflation by hiking the repo rate for banks, simultaneously increasing its lending rate and discouraging investors from borrowing from financial institutions.

As you can see, your influential repo rate can be your interest rate, but it is not solely the factor that decides a bank’s interest rate; there are many factors internally or externally affecting the charges applied to the lending amount.

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Fullerton India12.00% - 24.00%
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IndusInd Bank10.49% - 31.50%
Kotak Bank10.75%
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Tata Capital10.75% - 18.00%
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PNB Housing Finance8.50% - 10.35%
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