How the repo rate affects the life of the common man.

 

Those who had hoped to reduce loan interest rates before the festivals were not fulfilled. Because the Reserve Bank of India (RBI) announced RBI monetary policy repo rate decision to keep the key interest rate repo rate constant at 4 per cent after the review meeting of the monetary policy. The reverse repo rate has also been retained at 3.35 per cent.

 

Repo rate is the interest rate at which the Reserve Bank gives short term loans to all banks in India. If this is cut, then banks would have to pay less interest to the RBI, like banks charge interest as EMI after giving a loan to their customers. If there were cuts, it would have an impact on the EMI of the public as well.

 

Conversely, if the Reserve Bank had increased the rate of repo rate, it would have become an expensive repo rate linked home loan. This would increase the interest rate for Home loan, Car loan and all other loans. However, this happens only when the demand for loans in the market is good. Due to Coronavirus, there is very less demand for loans in the market at this time. Therefore RBI has kept it stable now.

 

The reverse repo rate is the rate the Reserve Bank of India pays to banks as interest. Banks keep their surplus amount with the Reserve Bank. RBI pays interest on this. Whenever there is increased liquidity in the market, on this the RBI changes the rate so that banks can pledge large amount to them to earn more interest.

 

After these two rates, the cash reserve ratio (CRR) also plays an important role. It is directly related to the EMI of the customers. The bank has to deposit a part of the total cash reserve with the Reserve Bank. This amount is kept for the time of trouble. It is used on problems with the bank. If this increases, banks will have to keep a much larger amount in the Reserve Bank. With this, they will be able to distribute less debt.