The Central Bank Increases the Repo Rate – Should You Be Concerned?

A country’s Central Bank establishes the framework for the economy. All lenders and financial institutions adhere to the central bank’s policies and recommendations. Every few of years, the central bank evaluates the economy to determine if its objectives are being realized. These objectives are primarily concerned with limiting inflation. If the strategy is off course, they plan and make adjustments to reach their objective.
The Reserve Bank of India is the name of the central bank in India (RBI). The Reserve Bank of India plans and forecasts banking policies. They were recently brought to light when the repo rate was hiked by 25 basis points. The RBI has upped the repo rate for the second time in four years. Today’s rate is 6.50%, which is 50 basis points higher than it was four years ago when it was 6.00%.

What does Repo Rate mean?

Repo rate is the interest rate at which the central bank loans money to commercial banks when they are unable to maintain an adequate balance. This equilibrium is determined by the central bank (RBI). When a commercial bank is unable to maintain this balance, it can borrow the funds from the RBI at an interest rate.

Why did the RBI raise its Repo rate?

The RBI hiked the interest rate in order to meet its goal of keeping inflation around 4%. By increasing this rate, a series of events will occur. Since the repo rate is high, banks would borrow less from the RBI. Consequently, they will have insufficient funds to lend to the customer. They will lend the remaining funds with a higher interest rate. Consequently, many customers will avoid taking out loans, reducing demand. This will eventually reduce inflation.

Should this rate’s growth be reason for concern?

Yes. When the Reserve Bank of India increases the Repo rate, commercial banks increase the interest rates on various loans, such as personal loans and mortgages. As a result of the increase in the interest rate, the customer’s monthly payment will increase. Yes, if your loan has a variable interest rate, the EMI will be adjusted based on market circumstances and when the RBI raises the repo rate. Consequently, the customer’s debt burden will now be greater than it was previously. With mounting debt, it may be prudent to consider prepaying loans in part or in full.

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