The Reserve Bank of India recently revised the repo rates by 25 basis points. The new rate now stands at 6.25%. The RBI has taken this decision to strike a balance between inflation and economic growth. The repo rate is the interest rate at which the RBI lends money to commercial banks.
A higher repo rate makes it more expensive for banks to borrow money from the RBI, which in turn, slows down the economy. A lower repo rate makes it cheaper for banks to borrow money from the RBI, which in turn, boosts the economy. The RBI uses the repo rate as a tool to control inflation.
In its monetary policy statement, the RBI said that it expects inflation to remain within the range of 4% to 4.5% in the second half of the financial year. It also said that it will continue to monitor developments on the inflation front with fresh data.
The RBI reduced the repo rate by 25 basis points in August this year, to boost economic growth. However, it refrained from reducing rates further in October, due to concerns about inflation.
The central bank’s decision to revise repo rates is a welcome move. It will help in keeping inflation under control and also support economic growth.
Understanding the RBI Repo Rate, Why Did RBI Change the Repo Rates?
Understanding the RBI Repo Rate “World economic volatility and uncertainty, as well as rising inflation, have prompted the RBI to raise the repo rate to 6.5%.” The silver lining is that inflation is expected to moderate in 2024-25, with the RBI aiming to keep inflation within its target range of 4%.
What Are the Implications of the Repo Rate Revision?
Since the repo rate has raised, banks will now have to pay a bit higher amount of interest to the RBI, which will be collected from the banks’ retail/corporate borrowers. This would result in higher interest payments on bank loans. Loans in general will thus become 1-2% more expensive.”
How Does the Repo Rate Affect Banks and Consumers?
As a powerful arm of Indian monetary policy, it can regulate the country’s money supply, inflation levels, and liquidity, and the levels of repo automatically have a direct impact on the cost of borrowing for banks. The greater the repo rate, the greater the cost of borrowing for banks, and vice versa.
Also, it does there would be a huge impact on interest rates on Repo Rate
What Other Factors Influence Interest Rates?
However, it impacts stock market conditions, international investments, government borrowings & inflation.
Should Consumers Worry About the Impact of the Repo Rate Increase?
When borrowing costs rise, the average person is discouraged from making unnecessary purchases, reducing demand for goods and services. This sets off a chain reaction that reduces prices and, as a result, inflation.
Moreover, it is a simple game of demand and supply, with the repo rate acting as a catalyst. On the other hand, people who have savings and a fixed deposit, for example, will benefit from an increase in interest rates.