In simple terms, repo rate refers to the rate at which the Reserve Bank of India (RBI) lends money to commercial banks in the event of a shortage of funds. This rate usually acts as a great tool to keep inflation under control.
What is the repo rate?
The rate at which banks usually borrow money from RBI in case of a shortage of funds is known as the repo rate. In case if the repo rate is high banks usually have to pay a high-interest rate which inturn requires customers to pay high-interest rate when borrowing loan.
A reduction in the repo rate also known as repurchase rate helps individuals lower the cost of borrowing of their secured as well as unsecured loans. The loan is offered to commercial banks against collateral such as government securities with an agreement to repurchase the collateral in the future at a fixed amount. Repo rate is decreased or increased in two scenarios i.e. when inflation rises and when RBI wants to pump more funds in the system.
This year in August’19, The Reserve Bank of India (RBI) announced the repo rate cut by 35 basis points. Reduction in the repo rate helps banks avail loan from a commercial bank at a lower rate. This, in turn, helps individuals avail a loan from the bank at a low-interest rate. A high repo rate leads to availing short term funds at a high-interest rate, whereas a low repo rate automatically brings down the interest rate at which banks borrow funds from the RBI. Thus, a low repo rate allows banks to offer loans at a low-interest rate, whereas, high repo rate results in the high-interest rate charged.
What is reverse repo rate?
This is the opposite of repo rate is the rate at which the commercial banks lend money to the RBI. An increase in the repo rate leads to a decrease in the supply of money and vice versa.
Impact of current repo rate cut on personal loan EMI
As of August 2019, the repo rate stands at 5.40% being cut down by 35 basis points from 5.75%. Additionally, the reverse repo rate has been reduced to 5.15% from 5.50%. As the repo rate decreases banks decrease the marginal cost-based lending rate that further leads to customers paying low EMI towards their personal loan. The reduction in the repo rate tends to have a direct impact on the interest rate paid by the customers towards their personal loan as well as other loans.
In case if the lender plans on hiking the interest rate on your existing personal loan, then you can transfer your loan from one lender to another. Consider borrowing a personal loan from an NBFC or an online lender as that will help you get a personal loan an affordable interest rate. Additionally, NBFCs and online lenders follow a simple online application process, requiring you to do minimum paperwork and offering instant disbursals.
You can also choose to opt for a Flexi personal loan that allows you to withdraw money as per your requirement, depending on the pre-approved limit offered to you. Based on your requirement, you can withdraw money as and when you desire and pay interest only towards the money withdrawn. The Flexi loan requires you to pay only the interest in the form of the EMI and the principal amount can be paid towards the end of the loan tenure. Further, this type of loan also allows you to make part prepayments at zero foreclosure charges.
For instance, let’s consider the below example:
If the repo rate is 5% and commercial banks avail loan of Rs. 1lakh from the RBI, then the interest paid out on the same would be 5000. This low repo rate indicates that customers can avail personal loans from banks at a low-interest rate. To calculate EMI at different interest rates, you can use personal loan emi calculator by Upwards
Historical data of the repo rate
| Date | Repo Rate(%) |
|
07-Aug-19 |
5.4 |
|
06-Jun-19 |
5.75 |
|
04-Apr-19 |
6 |
|
07-Feb-19 |
6.25 |
|
01-Aug-18 |
6.5 |
|
06-Jun-18 |
6.25 |
|
02-Aug-17 |
6 |
|
06-Apr-17 |
6.25 |
|
04-Oct-16 |
6.25 |
|
05-Apr-16 |
6.5 |
|
29-Sep-15 |
6.75 |
|
02-Jun-15 |
7.25 |
|
04-Mar-15 |
7.5 |
|
15-Jan-15 |
7.75 |
|
28-Jan-14 |
8 |
Conclusion
Repo rate helps in regulating India’s monetary policy by helping in controlling inflation and money supply. Since repo rate has a direct relationship with the cost of borrowing for banks, a high repo rate increases the cost of borrowing and vice versa. As a personal loan applicant, considering the interest rate offered by various banks is important as the low-interest rates will help you decrease your EMI outflow and increase savings. You can use a personal loan EMI calculator bu Upwards to get an estimate of the EMI you will have to pay towards your loan amount.
