What is the RBI's repo rate? How does it affect your loan EMIs?

The Reserve Bank of India Monetary Policy Committee (MPC) commenced its three-day session on Tuesday, August 8. The committee is due to come out with its recommendation on Thursday regarding the bi-monthly policy of the RBI. As per analysts, the central bank may choose to maintain the repo rate at the existing level. The repo rate was last raised by the RBI in February and stands at 6.5 per cent presently.

Any change in the repo rate has a lot of consequences for borrowers. Here is a detailed analysis of what the RBI’s repo rate is and how it can affect Equated Monthly Instalments (EMIs).

What is the repo rate?

Repo rate or repurchasing option rate is the rate at which commercial banks borrow money from the RBI. The rate affects the interest charged on loans and deposits by commercial lenders, which in turn determines how much banks can borrow from the RBI. Any change in the repo rate affects a number of factors such as inflation, loan interest rates and currency exchange rates.

What does a change in the repo rate denote?

If the central bank wants to make more money available in the economy, it lowers the repo rate, enabling banks to borrow at a lower rate of interest. If the RBI wants to discourage borrowing by banks, it raises the repo rate to reduce the liquidity in the market.

Since May last year, the RBI had embarked on a cycle of raising repo rates to combat inflation. The bank kept the repo rate unchanged in April and June, indicating that it believes the economy is back on track and there is no need to restrict the supply of money in the market.

How does the repo rate affect home loan EMIs?

A borrower’s home loan and EMI is dependent on the repo rate. As the central bank alters the repo rate, the interest rates of the commercial banks also change. A rise in the repo rate will lead to a hike in home loan EMIs as banks will increase their interest rate. This means there will be an increased burden on the borrower.

If the RBI lowers the repo rate, the banks are mandated to bring down their interest rate as well. This means the customer will have a lower burden of repayment.