Repo Rate & Reverse Repo Rate
RBI lends money to domestic commercial banks. it also stands for repurchase option or repurchase agreement, these agreements direct banks to mortgage their security to the RBI as a guarantee or to sell their securities to the Reserve Bank of India and then repurchase them at a pre-determined price. That is used to keep inflation at bay and maintain liquidity.
By repo rate, RBI curbs inflation when necessary. Alternatively, it may be used to boost growth by reducing the repo rate.
Unlike repo rate in reverse repo rate central banks (RBI) borrows money from commercial banks at predetermined interest. The money supply is controlled across the country by this monetary policy tool of the reserve bank of India
What are the causes led to a hike in the Repo rate?
Recently the governor of the reserve bank of India has announced a hike in the repo rate. though the repo rate was the same since 2018 now it has been increased by 40 basis points to 4.4%.
The recent upsurge in repo rate shows now banks will get the same funds at a higher interest. This resulted in the bank will also increase their interest on loans for people. And that will diminish the money supply which impacts the economy and controls inflation.
- Repo rate is contingent on the circumstances in the economy. The Reserve bank of India (RBI) changes the repo rate to boost the growth of the country and battle inflation.
- Last years have brought arduous change for the world outbreak like covid19 impacted the economy. And this economic damage negatively affected manufacturing and service industries and supply disruption has caused the price rise pressure. And this inflationary pressure has gone beyond tolerance for the last six consecutive months. There was a need to take measures to protect the domestic economy from the severe effects of the covid 19 on demand and supply.
- Current situation of Russia –the Ukraine conflict has also proved devastating for the economy. Rising crude oil prices, and high retail price margins induced the cost-push-up inflation. The consumer price index (CPI) has gone beyond the anticipation. With 7.0 percent CPI inflation surged from 6.1 percent in March and it was substantially above RBI’s tolerance limit.
The war has caused a 52% hike in overall inflation on food, beverage, transportation, fuel, and light since February. As a result, the April CPI inflation has reached its highest rate in eight years. for the time being the war between Russia and Ukraine doesn’t appear to be slowing down. This huge impact of war on deteriorates the global economy which doesn’t seem to be subsiding easily.
How does this hike in repo rate Impacts your finance?
The Reserve bank of India (RBI)’s announcement of a hike in repo rate will impact broadly.
Impact on Economy
Bank’s borrowing capacity is directly affected by the repo rate. A higher repo rate results in a lower borrowing capacity. The Repo rate has an essential role in the economy which controls the inflation and cash flow in the market. the RBI increases the repo rate in response to high inflation, which slowdowns the market’s cash flow. Ultimately cash flow slows the production capacity and investment, causing the inflation to fall. Only When the RBI finds a fall in inflation, decreases the repo rate which makes it smoother for the bank to borrow money from the RBI, Thereby repo rate affects the nation’s economy broadly.
Impact on the Common Man
An increase in repo rate directly affects the bank’s offers, such as home loans, auto loans, interest rates, and personal loans. In turn, this affects directly the common man.
- Rise in repo rate will increase the home loans and the property price will rise as well consequently homebuyers’ acquisition costs will increase, which will reduce the residential sales.
Chairman of ANAROCK Anuj Puri said “unfortunately, for home buyers, this hike signals an imminent end of the all-time low-interest regime, which has been one of the major drivers behind home sales across the country since the pandemic began” - Getting a personal vehicle is indeed a big deal. New care prices were severely affected by the supply constraint and higher input costs. in addition, the skyrocketed price of fuel was already a major obstacle and higher vehicle loans added one more reason to defer the vehicle purchase.
- Floating rate EMIs and personal loans will be pricier. Existing borrowers don’t need to worry about their EMI and interest rate because they will remain the same.
Fall in Inflation
It’s quite evident that looking at the predicament of the current economy, RBI has declared a Hike in repo rate, to mitigate those unprecedented circumstances which have been brought about by Covid and the Russia& Ukraine war.
Hike in the repo rate slows down the borrowing and money supply it controls the liquidity of the money which causes an increase in retail inflation. Repo rate impacts widely on the economy it influences almost everything, Loans ( home loan car and personal loan), mortgage, and credit card become costlier which makes borrowing expensive and cool off the demand. When the price of goods and services gets decreases, that brings inflationary pressure under control.
Impact on the Stock Market
An increased repo rate leads to Expensive business loans and businessmen put a halt to the expansion of ideas and strategies. And this discouraging behavior becomes the hurdle in their growth which impacts negatively and affects the prices of their shares in the stock market.
“Investors are likely to feel the heat in the short term as central bank across the globe tries to curb the inflation by hiking interest rates,”
Sujan hajra, chief economist and many stockers said.
Hence increasing the interest rate causes more people to save and capital flows to diminish in the economy. The stock market plummets as a result.
In a Nutshell
High-interest rates and growth have an inverse relationship. In the event that the central bank hikes interest rates the growth of the nation’s economy get slow. On the other hand Consumers and businesses are discouraged from spending when borrowing costs are high. This reduces inflation.
A recent rate hike by the central bank increased the repo rate by 40 basis points (bps) to 4.40 percent. Repo rate hike impacts variously to the economy;
- Impacts economy
- Impacts the common people
- Impact on equity market
- Fall in inflation
This sudden hike in rates has arisen several questions in our minds such as Will a hike in the repo rate affect the economy? Or does this hike in repo rate slow down the nation’s growth? Or what would be the consequences of this hike in repo rate? all of these questions took place the moment it was announced by the RBI governor shaktikanta Das.
