India is a developing country and has a massive population. This means that there are a lot of unorganized sector businesses and most of them are exposed to risks. The RBI has decided to hike the repo rate by 40 basis points, and this will affect a large number of unorganized sector borrowers. This blog talks about how the hike in repo rates will affect the borrowers and the depositors. Let’s look in detail!
Repo-linked loans: what are they?
The Reserve Bank of India (RBI) has increased the repo rate, which is the rate at which banks borrow money from the RBI (or the reverse repo rate, which is the rate at which the RBI lends money to banks). This rate is lower than the rate at which banks borrow from each other, which is called the marginal standing facility (MSF).
How will the repo rate hike affect all types of loans?
The repo rate is the interest rate at which a central bank like the RBI lends money to its member banks. This rate is changed by the RBI based on its policy for the Indian economy. This rate also affects the interest rate on all loans. If you have a loan out with a bank, you are probably going to see an increase in the interest rate. Unlike other interest rates, the repo rate hikes are usually announced a few weeks in advance. Here are some of the loans that are going to see a hike in interest rates:
⦁ Home loans
⦁ Car loans
⦁ Personal loans
⦁ Term deposits
⦁ Fixed deposit
⦁ FD linked insurance policies
⦁ Credit cards
⦁ Loans for education
Does the repo rate hike affect home loan borrowers right away?
A repo rate hike means that banks will have to pay the RBI more to park their funds. The RBI has raised rates to control inflation in the country, and when banks have to pay more to park their money with the RBI they are likely to charge higher interest rates to their borrowers as well. In an environment where the central bank is tightening monetary policy, it is likely that home loans will become more expensive. A home loan is a secured loan, and when the RBI raises the repo rate, a bank is likely to follow suit and increase its home loan interest rates, or EMIs. This is why home loan borrowers have to be careful when they apply for a home loan. If he/she applies at a time when the interest rates are low, he/she will be able to get a lower interest rate.
Are depositors likely to benefit from the recent increase in the repo rate?
The Reserve Bank of India (RBI) increased the repo rate by 40 basis points on. This, in turn, means that the banks are likely to increase their lending rates. The banks, however, may not pass on the entire increase to the retail customers. This is because of the intense competition among the banks to attract customers.
Besides, the lead time for an increase in the lending rate is usually more than a month. So, even if the banks increase the lending rate now, it will take some time for the rate to actually be implemented. This can be used to your advantage if you have a loan from the bank. In case the bank does not pass on the entire increase in the lending rate, you can ask them to waive off the increase based on the fact that the banks have also increased the deposit rate by 65 basis points when the increase in the repo rate is only 40 basis points.
We hope that you have enjoyed reading this blog post on the repo rate hike by the RBI. An additional 40 basis points on the repo rate means that banks will have to pay more for their deposits, and will have to pay more for the loans that they take. We hope that you have found this article to be helpful, and have a better understanding of what the repo rate hike by the RBI means for depositors and borrowers! Visit openplot.com for more info.